Non Conforming Loan: What Is It and How Does It Work?

Conforming loan limits set the maximum mortgage amount you can borrow from government-sponsored enterprises. In 2024, that’s a baseline amount of $766,550. But what if you want to borrow more?

Look no further than a non conforming loan. Non conforming loans do not adhere to the guidelines of GSEs like Fannie Mae and Freddie Mac. Instead, they offer flexible terms to the borrower.

But before you opt for a non conforming mortgage, it is crucial to get pre-approved. A pre-approval can determine your loan amount and estimate your monthly payments. So what are you waiting for?

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What Is a Non Conforming Loan?

A non-conforming loan operates outside the guidelines set by government-sponsored enterprises. It caters to borrowers who don’t meet the standard criteria for conforming loans.

Since non-conforming loans can exceed conforming loan limits, they allow you to borrow larger amounts of money. They are also more lenient when it comes to credit and debt-to-income (DTI) ratio requirements.

Moreover, non-conforming loans accommodate those who wish to buy unconventional properties. So, this loan type offers flexibility in the amount you borrow, the type of property you want to buy, and the terms of your loan.

Types of Non Conforming Loans

Government-backed loans and jumbo loans are the two main kinds of non-conforming loans.

Government-Backed Loans

Government agencies like the Federal Housing Administration (FHA), the US Department of Agriculture (USDA), and the US Department of Veteran Affairs back these non-conforming loans.

FHA Loan: You can secure FHA loans with a credit score of just 580, and down payments as low as 3.5%.
USDA Loan: Rural homebuyers can opt for USDA loans. They have low interest rates, and do not require a down payment or private mortgage insurance.
VA Loan: VA loans are specifically for veterans and surviving spouses. If you qualify, you can secure a loan with zero down payment.

Jumbo Loans

A loan that exceeds conforming loan limits is called a jumbo loan. Though the interest rates are higher, jumbo loans allow you to finance high-cost properties. With this loan type, you can borrow your desired amount without restrictions.

Conforming vs Non Conforming Loans

Here are the key differences between conforming and nonconforming loans:

Conforming Loans	Non-Conforming Loans
Insured by Fannie Mae and Freddie Mac. They are easily available in the market.	Can be risky for lenders. They are less easily available.
Meet the criteria established by the federal government.	Terms depends on the requirements of the borrower and mortgage lender.
Only allow loans up to a certain amount, as per the conforming loan limits.	No restriction on the loan amount.

Pros and Cons of Non Conforming Loans

Non conforming loans come with the following benefits and drawbacks:

Pros

Large Loan Amounts: A non-conforming mortgage allow you to borrow more than the conforming loan amount. This means you can buy high-value properties or homes in expensive housing markets.
Lenient Requirements: You can secure government-backed loans with low down payments and a lower credit score. Non-conforming loans can also offer more flexibility in DTI ratios.
More Flexibility: This loan type caters to borrowers who don’t meet conforming loan guidelines. You can buy any type of property, from multi-unit residences to vacation homes, with a non-conforming loan.

Cons

Less Availability: Lenders typically prefer conforming loans, as they adhere to GSE guidelines. It might be difficult to find a lender who meets your requirements for a non-conforming loan.
High Risk: Since there are no standardized guidelines for non-conforming loans, they can be riskier to repay. An unexpected shift in interest rates could also mean limited refinancing options.