What is a non-conforming loan?

A non-conforming loan is any mortgage that is not partly guaranteed by a government department or agency.

Conforming loans are conventional loans that meet the rules set by Fannie Mae and Freddie Mac. If they fit Fannie and Freddie’s guidelines, then your lender can sell the mortgage to those agencies after closing.

As the name suggests, non-conforming loans don’t conform with Fannie and Freddie’s rules. And they’re not backed by the government like an FHA, VA, or USDA mortgage. That means non-conforming loans can be more creatively drafted and tailored to fit your and your lender’s needs.

Types of non-conforming loans

The most popular type of non-conforming loan is a jumbo loan. Jumbo loans have a higher value than Fannie and Freddie allow.

Conforming loan limits

Each year, the Federal Housing Finance Agency (FHFA) announces the following year’s loan limits up to which Fannie and Freddie can lend.

The current loan limits are 766,550 for mortgages in areas where home prices are below or around the national average.

Limits run as high as 766,550 in higher-cost areas and Alaska, Hawaii, Guam, and the U.S. Virgin Islands.

So, if you need to borrow a loan amount that’s larger than your local FHFA ceiling allows, you’ll need a non-conforming loan in the shape of a jumbo loan.

Other reasons applicants get non-conforming mortgages

Sometimes, a person applying for a mortgage can’t tick all of Fannie and Freddie’s boxes even if he or she is clearly a sound borrower.

Low credit score

Take, for example, someone whose credit score is 610 due to a prior medical issue. If her credit score is down at 610, Fannie and Freddie won’t lend to her since their minimum credit score is 620.

An individual lender might approve a loan if she’s a great borrower in other respects: has few existing debts or a large down payment. But it won’t be a conforming mortgage because Fannie and Freddie’s rules exclude her. It might offer her a non-conforming loan.

Property problems

Sometimes the borrower is well-qualified but the property isn’t. For example, someone who buys a log cabin in the suburbs may need a non-conforming loan because there are no comparable properties by which to verify the value.

The property could be a condo within a complex that is not approved by any of the major lending agencies like Fannie Mae and FHA.

There are many reasons a property can’t get traditional financing and in those cases, applicants may opt for a non-conforming lender and loan.

Pros & cons of non-conforming loans

Pros of non-conforming loans

1. Greater flexibility than conforming loans. Your lender can construct a deal that suits you and it.
2. Higher loan limits. Jumbo loans often run into the millions. Each lender sets its own limits.
3. More property options. The more you can borrow, the wider your choice of homes.

Cons of non-conforming loans

1. More personalized requirements mean a lender might put in clauses that disadvantage you. You might need professional advice when you’re negotiating your deal.
2. Fewer lenders to choose from. Many but not all lenders offer jumbo loans. Fewer yet offer other sorts of non-conforming loans.
3. Higher interest rates. Without government backing, your lender has no one with whom to share the loss if your loan goes bad. Inevitably, higher risk means higher rates.
4. Harder to qualify for. This isn’t always the case but is often true, especially with jumbo loans.

A non-conforming loan may be just what you need. But you should reassure yourself over your contract’s terms and your ability to comfortably afford your mortgage.

Benefits of a conforming loan

If a lender can sell your loan to Fannie or Freddie then its risk is limited.

So conforming loans often come with some significant upsides compared to non-conforming ones. For example, you may:

1. Find it easier to get your application approved. You usually just have to meet Fannie and Freddie’s minimum standards.
2. Often be offered a lower mortgage rate.
3. Need a lower down payment. 3% is the standard minimum for the most popular conforming loans.
4. Get away with a lower credit score. 620 and up is a common requirement.

Most borrowers only opt for a non-conforming loan if they need the higher borrowing limits of a jumbo mortgage. Otherwise, they would usually be better off with a government-backed mortgage. More information on those below.

Benefits of a government-backed mortgage

These are non-conforming loans in the sense that they don’t conform to Fannie and Freddie’s requirements. But the mortgage industry doesn’t define them that way because they’re not conventional mortgages.

There are three flavors of government-backed loans:

• FHA loans. These are backed by the Federal Housing Administration and open to anyone.
• VA loans. These are backed by the Department of Veterans Affairs and available to veterans, current service members, and very few closely related groups.
• USDA loans. These are backed by the US Department of Agriculture and intended to promote rural development. You’ll need to have an average or below-average income for your area and be buying in a designated rural (or sometimes suburban) area. But 97% of America’s landmass is so designated.

Of course, none of these loan types is an alternative to a jumbo loan. They all have loan limits that are typically lower than those for conforming loans. You can find the current loan limit where you want to buy using a look-up tool on the website of the Department of Housing and Urban Development.

FHA loans

For an FHA loan, you’ll need a down payment of 3.5%. You can be approved for an FHA loan with a credit score as low as 580, though in that case, you’ll need a down payment of 10%. These are often chosen by borrowers with damaged credit scores.

Just watch out for mortgage insurance premiums (MIPs). These can be costly.

VA loans

Few are eligible for these because they require minimum levels of military service. But they offer considerable benefits to those who qualify. They come with zero down payment, low, lower interest rates, lenient credit score requirements, no loan limits and no continuing mortgage insurance.

USDA loans

USDA loans offer a zero down payment requirement, low rates and a relatively easy credit score threshold.

But you will be on the hook for mortgage insurance, though at a lower cost than an equivalent FHA loan.

Important note

It’s worth noting that each department or agency has minimum requirements but lenders are free to impose their own, stricter standards for these mortgages — and for conforming loans. So, if you’re turned down even though you comply, shop around for more sympathetic lenders.

However, you should be shopping widely for your loan anyway. Because you could save thousands by seeking out the lender that’s ready to offer you the best mortgage deal.

When is a non-conforming loan the right choice?

If you want to borrow more than Fannie and Freddie allow, you’ll need a jumbo loan. And those, by definition, are non-conforming.

Other sorts of non-conforming loans are possible. But they’re rare in the real world.

So most people who can’t get or don’t want a conforming loan turn to government-backed ones.

Non-conforming loan FAQ

Is a jumbo loan non-conforming?

Yep. In fact, it’s by far the most common type of non-conforming loan.

What is a non-conforming conventional loan?

Conventional loans are ones that aren’t backed by a government department or agency. And non-conforming loans are ones that aren’t compliant with Fannie Mae’s and Freddie Mac’s standards.

So all non-conforming loans are conventional ones. And that means all jumbo loans and (much more rarely) a few private, lender-borrower mortgages are non-conforming conventional loans.

Can non-conforming loans be sold to Fannie Mae or Freddie Mac?

No. Fannie and Freddie are only able to buy mortgages that conform to their standards. And, by definition, non-conforming ones don’t.

Can you refinance a non-conforming loan?

Absolutely. You can typically refinance just about any mortgage. So, if you want a lower rate, some cash or to swap to a conforming home loan, you can do so.

But, of course, you’ll have to find a willing lender. And you’ll need to meet the “underwriting standards” (borrower requirements) it sets.

What are non-conforming loan limits?

There aren’t any formal ones. A lender that isn’t conforming with Fannie and Freddie’s standards can lend as much as it’s comfortable with. And jumbo loans often go up to a few million dollars.

Obviously, every jumbo lender will make exhaustive checks to satisfy itself that you can comfortably afford your mortgage payments. So your maximum loan amount will be set by your circumstances as much as the lender’s policies.

In contrast, conforming loans and government-backed mortgages all have loan limits, noted above.