A non-conforming loan is any mortgage that does not meet the purchase criteria for Fannie Mae or Freddie Mac, the two major entities that buy most conforming loans from lenders. The Federal Housing Finance Agency (FHFA) sets yearly loan limits that define the boundaries of conforming loans; for 2024 and 2025, the baseline conforming loan limit for a single-family home is $766,550 in most U.S. counties, though this limit rises in higher-cost regions. Loans exceeding these limits are classified as jumbo loans, the most common type of non-conforming loan.
Besides loan size, borrower financial factors such as credit score, debt-to-income ratio (DTI), employment stability, and documentation requirements can cause a loan to be non-conforming. For example, borrowers who are self-employed or have non-traditional income documentation may seek non-conforming loans due to the flexibility lenders offer.
The type of property financed can also influence conformity. Properties that are unique, multifamily units exceeding four units, or those with unusual appraisal challenges may require non-conforming financing.
Types of non-conforming loans include:
- Jumbo Loans: Mortgages above FHFA loan limits, typically requiring higher credit standards and larger down payments. See our detailed article on jumbo loans.
- Alt-A Loans: Loans for borrowers with quality credit but non-standard documentation or slightly higher risk profiles. These are less common today due to regulatory changes.
- Subprime Loans: Designed for higher-risk borrowers with poor credit, these loans have largely declined since the 2008 financial crisis.
- Portfolio Loans: Loans kept by lenders instead of being sold on secondary markets, often allowing for more flexible underwriting.
Comparing non-conforming loans with conforming loans highlights differences in loan size, buyer qualifications, property types, interest rates, and availability. Conforming loans have standardized underwriting, often lower interest rates, and are widely available, while non-conforming loans generally come with higher rates and stricter borrower requirements.
Borrowers might opt for non-conforming loans to finance high-value homes, investment properties, or if they have complex financial situations not supported by conforming loan guidelines.
When considering non-conforming loans, be mindful of higher interest rates, larger down payments, more stringent documentation, and limited lender options. Shopping around and understanding loan terms thoroughly can help borrowers secure favorable conditions.
Common Misconceptions:
- Non-conforming loans are not just for borrowers with poor credit; jumbo loans often serve buyers with excellent credit.
- Non-conforming loans are not inherently riskier if the borrower’s financial situation is strong and they can afford the property.
- Government-backed loans like FHA and VA have separate guidelines and do not fall under conforming or non-conforming categories as defined by Fannie Mae and Freddie Mac.
To navigate options effectively, understanding the differences between loan types is crucial. For more on conforming loans, see our Conventional Mortgage article.
Sources:
- Federal Housing Finance Agency (FHFA). “FHFA Announces Conforming Loan Limits for 2024.” https://www.fhfa.gov/Media/PublicAffairs/Pages/FHFA-Announces-Conforming-Loan-Limits-for-2024.aspx
- Consumer Financial Protection Bureau (CFPB). “What is a Conforming Loan?” https://www.consumerfinance.gov/ask-cfpb/what-is-a-conforming-loan-en-106/
- FinHelp Glossary: Jumbo Loan, Conventional Mortgage (internal links)