Non-conforming conventional loans are an important option for homebuyers who don’t qualify for conforming loans backed by Fannie Mae and Freddie Mac. While conforming loans follow strict guidelines on loan amounts and borrower qualifications, non-conforming loans offer more flexibility. In this comprehensive guide, we’ll explain everything you need to know about non-conforming conventional loans.
What is a Non-Conforming Loan?
A non-conforming loan is a mortgage that does not meet the requirements to be purchased by Fannie Mae or Freddie Mac These two government-sponsored enterprises set guidelines for the loans they will buy from lenders and package into securities to sell to investors, Loans that fall outside these parameters are considered non-conforming,
The most common types of non-conforming loans are
-
Jumbo loans – Mortgages above conforming loan limits, which are typically $548,250 in most areas. Jumbo loans help luxury homebuyers or those in expensive real estate markets finance higher mortgage amounts.
-
Portfolio loans – Mortgages that lenders hold in their own investment portfolios instead of selling to Fannie Mae or Freddie Mac. Portfolio lending guidelines are flexible.
-
Government-backed loans – FHA, VA and USDA loans have their own separate guidelines. These special programs help specific demographics like rural borrowers, veterans and those with lower incomes or credit challenges buy homes.
Non-conforming mortgages serve an important purpose – they provide financing options for scenarios conforming loans can’t accommodate.
Non-Conforming Loan Requirements
While conforming conventional loans have strict underwriting standards, non-conforming loan guidelines are more flexible and vary by lender. Here are some typical requirements:
-
Minimum credit score – Often 620, but could be lower for government-backed loans or higher for jumbo loans
-
Down payment – At least 10-20% recommended, but some loans allow less
-
Debt-to-income ratio – Up to 50% or higher in some cases
-
Reserves – Some lenders want to see 6-12 months of mortgage payments in reserves
-
Home appraisal – Most lenders require an appraisal to ensure the property value supports the loan amount
Requirements are looser than conforming loans, but you still need decent credit, income, assets and a down payment to qualify. Government programs like FHA and VA loans offer exceptions for borrowers who fall short.
Benefits of Non-Conforming Loans
Non-conforming mortgages provide options for homebuyers who don’t fit the conforming loan box:
-
Higher loan amounts – Jumbo loans allow high-balance mortgages over conforming limits for luxury properties.
-
Flexible standards – Non-conforming loans offer more wiggle room for borrowers with credit dings, high debt or low down payments.
-
Specialty programs – FHA, VA and USDA loans help specific demographics purchase homes.
-
Custom lending – Portfolio loans allow personalized options based on your specific financial situation.
-
Debt consolidation – Non-conforming loans may allow you to consolidate higher debt burdens than conforming mortgages permit.
For large loans, unique cases or targeted buyer assistance, non-conforming mortgages provide valuable alternatives.
Drawbacks of Non-Conforming Loans
The main disadvantages of non-conforming loans are:
-
Higher costs – Interest rates are usually 0.25% to 0.5% higher and fees can be greater too.
-
Tougher standards – While flexible, non-conforming loans still have credit, income and asset requirements.
-
Limited availability – Not all lenders offer non-conforming loan products. Shop around to find options.
-
Can’t be sold to Fannie/Freddie – The lender retains all risk instead of selling the loan to free up capital for more lending.
-
No conventional financing – Government loans require upfront MIP and ongoing PMI premiums.
While non-conforming loans provide needed flexibility, they come at a cost. Make sure to weigh the pros and cons.
Types of Non-Conforming Mortgages
Non-conforming mortgages fall into three main categories:
Jumbo Loans
Jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac. High-cost and luxury real estate markets across the U.S. have conforming limits between $822,375 and $1,053,000. Jumbo loans start above those thresholds.
Because they cannot be sold to Fannie/Freddie, jumbo mortgages cost more. Expect to make a down payment of at least 20% to qualify. You’ll also need excellent credit and ample assets and reserves. But jumbos allow high-net-worth borrowers to finance seven-figure luxury homes.
Portfolio Loans
Portfolio lending means the lender funds and holds the mortgage in its own investment portfolio instead of selling it to Fannie Mae or Freddie Mac. This gives lenders flexibility to set their own underwriting guidelines.
Portfolio loans help borrowers who don’t meet conforming loan criteria, like those with past credit issues, high debt ratios or low down payments. While they cost more than conforming mortgages, portfolio lending provides an alternative option for unique financial situations.
Government-Backed Loans
FHA, USDA and VA loans all have separate guidelines from conventional conforming mortgages. These programs help provide affordable financing to targeted demographics.
FHA loans require just 3.5% down and allow lower credit scores, making them ideal for first-time and low- to moderate-income homebuyers. VA loans help servicemembers, veterans and surviving spouses buy with zero down. USDA loans assist low-income buyers in rural areas attain affordable 100% financing.
While government mortgages cost more and require mortgage insurance, they open homeownership opportunities for those who can’t qualify for conventional loans.
How Much Do Non-Conforming Loans Cost?
The main tradeoff for increased flexibility with non-conforming loans is higher costs. Here are some estimates for how much more non-conforming mortgages cost compared to conforming home loans:
-
Interest rates – 0.25 to 0.5 percentage points higher for jumbo and portfolio loans. Government-backed loans have similar rates to conforming mortgages.
-
Origination fees – Can be 0.25 to 0.5 percentage points higher than conforming loans. Government mortgages also have upfront MIP/funding fees.
-
Discount points – May need to pay additional points to buy down interest rates.
-
Ongoing mortgage insurance – Private MI for less than 20% down. FHA, USDA and VA loans require monthly MI premiums.
Run the numbers carefully when considering a non-conforming loan. While more flexible, chances are it will cost more overall. Shop multiple lenders to compare mortgage rates and fees.
Non-Conforming Loan Underwriting Process
The underwriting process for non-conforming mortgages mirrors that of conforming loans in many respects:
-
Submit a loan application with your personal and financial details.
-
Allow the lender to pull your credit report and review your income, tax returns, bank statements and other documents to verify eligibility.
-
Get an appraisal done on the home you want to purchase to confirm its value supports the loan amount.
-
Receive an initial loan decision and then submit any additional paperwork requested to complete underwriting.
-
Get a clear to close when the lender finalizes the loan approval.
Key differences include more lenient debt-to-income and credit score requirements, higher down payments, and additional reserves. Jumbo and government-backed loans also have special criteria. The lender will guide you through their specific non-conforming loan underwriting process.
Finding the Best Non-Conforming Loan Lender
The first step is understanding what type of non-conforming loan best fits your scenario so you can target the right lenders.
Jumbo loan borrowers should look for lenders like Chase, Wells Fargo and smaller banks and credit unions that offer portfolio lending programs. Veterans can check Navy Federal Credit Union and USAA for VA loans. FHA and USDA loans are available through most major lenders and smaller community banks and mortgage companies.
Next, compare mortgage rates and fees. Look for lenders that price their non-conforming loans competitively and offer the loan program that best matches your needs. Read online reviews and check their BBB rating. Make sure they have strong customer satisfaction before submitting an application.
A knowledgeable non-conforming loan officer will walk you through the differences compared to conforming mortgages and help tailor financing options to fit your unique situation.
Non-Conforming Loan Alternatives
If you don’t qualify for a non-conforming mortgage, here are some alternative options to consider:
- FHA, VA or USDA loan – If you don’t qualify for a jumbo
What Is a Non-Conforming Mortgage?
A non-conforming mortgage is a mortgage that does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac and, therefore, cannot be sold to them. GSE guidelines include a maximum loan amount, suitable properties, down payment requirements, and credit requirements, among other factors.
A non-conforming mortgage may be contrasted with a conforming mortgage.
- A non-conforming mortgage is a home loan that does not adhere to government-sponsored enterprises (GSE) guidelines and, therefore, cannot be resold to agencies such as Fannie Mae or Freddie Mac.
- These loans often carry higher interest rates than conforming mortgages.
- Mortgages that exceed the conforming loan limit are classified as non-conforming and are called jumbo mortgages.
- Other than the loan size, mortgages may become non-conforming based on a borrower’s loan-to-value ratio (down payment size), debt-to-income ratio, credit score and history, and documentation requirements.
Understanding Non-Conforming Mortgages
Non-conforming mortgages are not bad loans because they are risky or overly complex. Financial institutions dislike them because they do not conform to GSE guidelines and, as a result, are harder to sell. For this reason, banks will usually command a higher interest rate on a non-conforming loan.
Although private banks initially write most mortgages, they often end up in Fannie Maes and Freddie Macs portfolios. These two GSEs buy loans from banks and package them into mortgage-backed securities (MBS), which sell on the secondary market. An MBS is an asset-backed security (ABS) secured by a collection of mortgages originating from a regulated and authorized financial institution. While there are private financial companies who will buy, package, and resell an MBS, Fannie and Freddie are the two largest purchasers.
Banks use the money from the sales of mortgages to invest in offering new loans at the current interest rate. But Fannie Mae and Freddie Mac cant buy just any mortgage product. The two GSEs have federal rules limits to buying loans deemed relatively risk-free. These loans are conforming mortgages, and banks like them precisely because they will readily sell.
By contrast, mortgages Fannie Mae and Freddie Mac cannot buy are inherently riskier for banks to write. These difficult-to-sell loans must either stay in the banks portfolio or be sold to entities specializing in the secondary market for non-conforming loans.
Non-Conforming Loan Tips
FAQ
What is a non-conforming conventional loan?
What are the disadvantages of a non-conforming loan?
What is the difference between conventional and non-conventional loans?
What is the difference between a conventional loan and a conforming loan?
What is a non conforming mortgage?
These GSEs, overseen by the Federal Housing Finance Agency (FHFA), support much of the secondary mortgage market in the U.S. A loan could be labeled non-conforming for a number of reasons, such as: The amount of the loan exceeds conforming loan limits ($766,550 in most parts of the U.S. in 2024).
What is an example of a non-conforming conventional loan?
The most common example of a non-conforming conventional loan is a jumbo loan. As the name implies, jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac. They’re designed for people buying high-end properties or homes in expensive housing markets.
What is a nonconforming loan?
Mortgage loans that don’t meet the requirements for a conforming loan are considered nonconforming loans. Jumbo loans are nonconforming loans that exceed the maximum loan limit for an area — but loans can be nonconforming for other reasons beyond loan size.
Are conforming loans the same as conventional loans?
Conforming loans are not the same as conventional loans. Conventional loans refer broadly to all non-government-backed loans. Some, but not all, conventional loans are conforming loans. What is a nonconforming loan? A nonconforming loan does not meet standards set by Fannie Mae or Freddie Mac. As such, it’s not eligible for purchase by these GSEs.