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Non-Conforming Loan: Definition and Considerations

A Homebuyer’s Guide to Non-Conforming Loans

Buying a home is an exciting life milestone, but it’s also a significant financial commitment that can come with some unfamiliar terminology. One term you may encounter during the process is “non-conforming loan.” If you’re unsure what that means—or when you might need one—read on to learn more.

What Is a Non-Conforming Loan and How Does It Work?

A non-conforming loan is a type of mortgage that doesn’t meet the guidelines set by certain government-sponsored enterprises (GSEs) like the Federal Housing Finance Agency (FHFA), Fannie Mae, and Freddie Mac. As a result, it can’t be sold to Fannie Mae or Freddie Mac after it’s issued.

In other words, non-conforming loans are good for situations that fall outside of typical lending scenarios. For example, you may pursue a non-conforming loan if you’re buying a home priced above the FHFA conforming loan limits. You might also take this route if you don’t meet the credit and income requirements for a conventional loan.

Non-Conforming Loans vs. Conforming Loans

The main differences between conforming loans and non-confirming loans are:

Non-Conforming Loan	Conforming Loan
Doesn’t meet GSE guidelines and cannot be sold to Fannie Mae and Freddie Mac.	Meets GSE guidelines so that it can be sold to Fannie Mae or Freddie Mac.
May have higher interest rates or larger down payment requirements.	May have lower interest rates and lower down payment requirements.
Offers more flexibility for unique homebuying scenarios.	Offers less flexibility with loan limits, credit requirements, etc.

Since these non-conforming mortgages don’t follow the same rules as conforming ones, they often come with different terms, like slightly higher interest rates or larger down payment requirements. Despite this, they can be a great option for borrowers who need more flexibility, whether that’s to purchase a luxury property or navigate unique financial circumstances.

Types of Non-Conforming Loans

Some loans are always considered non-conforming, including interest-only loans, bridge loans, and non-qualified mortgages (non-QMs). Others, like jumbo loans or certain government-backed mortgages, can be conforming or non-conforming based on their structure.

Each of these loan types serves a different purpose and can benefit homebuyers at various stages of life. For example, jumbo loans are ideal for those purchasing homes that exceed FHFA conforming loan limits. On the other hand, government-backed loans—such as FHA, VA, or USDA loans—can make homeownership more accessible for buyers who may have a limited credit history or less money for a down payment.

Speak with a loan advisor to determine which option best meets your financial and homebuying goals.

Non-Conforming Government-Backed Loans

FHA Loans: Backed by the Federal Housing Administration, these loans have their own guidelines to help borrowers who might not meet the stricter requirements of conventional loans.
USDA Loans: Offered through the U.S. Department of Agriculture, these loans support buyers in eligible rural and suburban areas who may have limited savings or credit history.
VA Loans: The U.S. Department of Veterans Affairs provides these loans to veterans, active-duty service members, and certain eligible spouses. They typically require no down payment and offer flexible qualification standards.

Jumbo Loans

A jumbo loan is also a standard non-conforming loan. These loans typically have stricter loan requirements, such as a higher credit score or debt-to-income ratio. They can also go above the loan amounts set by GSE guidelines. These limits change from year to year, so be sure to check what they are when exploring your options.

People shopping for luxury homes or possessing strong credit profiles often go for jumbo loans. Some buyers in high-value markets, like California or New York, might also need a jumbo loan.

Non-Conforming Loan Considerations

Every loan type comes with its own potential pros and cons, including a non-conforming loan. A trusted mortgage lender can help you understand your options and decide whether a non-conforming loan is the right choice for your financial situation.

Non-Conforming Loan Pros

For some borrowers, a non-conforming loan can have some excellent benefits. These benefits can include:

Better access to financing: Non-conforming loans can make homeownership possible for borrowers who don’t qualify for conforming loans. Often, non-conforming loans have lower requirements for debt-to-income ratios and credit scores.
Higher loan limits: GSEs do not cap non-conforming loans, so people who want to buy a luxury home or one in a high-cost market can still get a loan.
Flexibility: Lenders can set their own guidelines for non-conforming loans. For people who work for themselves or have other sources of income, this can be a huge benefit.
Access to different property types: Some non-conforming loans can finance more than single-family homes. So, someone who wants to buy an apartment complex could use a non-conforming loan for that purchase. One can also be used to help people who flip houses.

Non-Conforming Loan Cons

You may find that some aspects of a non-conforming loan are a drawback for you, such as:

Higher interest rates: Non-conforming loans may come with higher interest rates. That’s because lenders, instead of GSEs, carry more of the risk with the loans.
Stricter underwriting: Because non-conforming loans come with extra risk, lenders may set higher underwriting standards. This can include higher credit scores, especially for jumbo loans.
Potential for unfavorable terms: Depending on the loan type, such as an interest-only loan, borrowers may find the terms aren’t as favorable. It’s always a good idea to talk to your mortgage lender about this.
Extra costs and fees: Some non-conforming loans may come with higher closing costs or additional fees.

After weighing the pros and cons of a non-conforming loan, your mortgage specialist can find something that fits your needs. Remember, if a non-conforming loan doesn’t work for you, there are other loan options you can consider.

Final Thoughts: Non-Conforming Loans

When you’re buying a home, you’ll have to consider what kind of loan works best for your situation. A non-conforming loan, a loan that doesn’t meet GSE standards, can be a good fit if you don’t expect you’ll meet conforming loan requirements. Non-conforming loans are also an option for those who want to buy luxury properties or who want more flexibility in their loan terms, though they might have higher interest rates as a tradeoff.

If you’re not sure which type of loan best fits your situation, consider getting prequalified to understand your options and see what you might qualify for.