 TITLE: What Is a Jumbo Loan? CONTENT: How Does a Jumbo Loan Work?\n---------------------------\nTo understand how a jumbo loan works, it's helpful to understand the purpose of \"conforming loans,\" which have a lending limit that's exceeded by jumbo loans: The Federal Housing Finance Agency (FHFA), which regulates Fannie Mae and Freddie Mac, was created during the Great Depression to make sure mortgage lenders have sufficient cash available to lend to Americans who want to buy a home. To that end, the FHFA authorizes Fannie and Freddie to purchase loans from banks, credit unions and other lenders, but only if those loans meet specific criteria aimed at protecting the GSEs from loss in case borrowers fail to repay the loans. One of those criteria is that the mortgages cannot exceed the conforming loan limit, which the FHFA sets annually for each county in the U.S.\nFannie Mae and Freddie Mac combine batches of conforming loans into financial instruments called mortgage backed securities (MBS) that investors buy and sell in public markets, much like stocks. The GSEs use the proceeds from MBS sales to buy and securitize even more mortgages. Lenders use money from the sales of loans to Fannie and Freddie to offer more mortgages, and the process continues.\nThe ability to sell a mortgage to Fannie Mae or Freddie Mac is a kind of safety net or guarantee for the lender, so when considering applications for jumbo loans, financial institutions typically are extra cautious in their efforts to verify applicants' ability to repay the loan. END