What Is a Non-Conforming Loan?

Non-Conforming Loans Explained

Definition

Non-conforming loans are mortgages that fall outside the jurisdiction of standard government loan insurers Fannie Mae and Freddie Mac.

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What Are Non-Conforming Loans?

Non-conforming loans are high value mortgage loans and those made to borrowers who would not typically qualify for a loan backed by Fannie Mae or Freddie Mac. These loans serve as part of the private lenders' investment portfolios. Unlike conventional mortgage loans, they're not bundled and resold.

How Non-Conforming Loans Work

The loan amounts are higher with a non-conforming loan, and the documentation required is more extensive. There can be some other differences as well:

  • The down payment may be larger.
  • The credit score threshold may be higher.
  • The debt-to-income ratio is firm.
  • Major cash reserves may have to be on hand.
  • Interest rates may be higher.
  • Closing costs and fees may be higher.

Loan Amounts

Non-conforming mortgage amounts vary by year and by locale. They're those for more than $647,200 in 2022, up from $548,250 in 2021. Non-conforming mortgage amounts start above $970,800 in 2022 in places where the cost of homes is much higher. This is up from $822,375 in 2021.

Documentation

Be prepared to provide the lender with a lot of information if you're seeking a loan outside the standard channels. You'll have to show many years of your income tax returns, as well as pay stubs and bank statements. You may be asked to have them appraised if you own any other assets or items of value. Lenders will seek out any bit of material that may be relevant to your wealth, credit, or income in order to decide whether you're a safe enough bet to offer a loan.

The Down Payment

Some lenders will accept a down payment of only 10%, but this isn't common. More often, they'll require private mortgage insurance with a down payment with just 10% down. Many lenders require a down payment of around 20%, but the exact amount depends on the details of the loan.

Your Credit Score

You'll need a credit score of at least 680 to obtain this type of loan. Private lenders make non-conforming loans so they can set their own credit score limits and can adjust them up or down. Your credit score will also affect the interest rate you pay. A higher credit score could save you money over the life of the loan.

Note

Keep your credit score up to the standard and maintain a spotless credit history if you're planning to apply for any type of mortgage loan. Spend time to go over your credit report and be sure that there are no errors that could drag down your score.

Debt-to-Income Ratio

Lenders look for a debt-to-income ratio of 40% or less, but they might settle for more if you have access to a large amount of liquid assets.

Cash Reserves

Most lenders of non-conforming jumbo loans will ask that you have a fair amount of cash reserves on hand because they'd take quite a loss in case of foreclosure due to the size of the loan. The amount of cash reserves is set by each lender, but it's often one year’s worth of mortgage payments.

Interest Rate

The interest rate on a non-conforming loan is almost always slightly higher than it would be on a loan of less value. Lenders compete to keep interest rates as low as they can while still making money.

Closing Costs and Fees

Closing costs and fees are higher on a non-conforming mortgage because fees are calculated as a percentage of the mortgage balance. There are also extra closing costs for this type of mortgage, such as a number of property appraisals.

Note

Lenders of non-conforming loans are private, so any of the guidelines (except loan limit) are made at their discretion. You may be able to secure this type of loan even if you've had a bankruptcy.

An Alternative to Non-Conforming Loans

Conforming loans are made by banks and other financial institutions and backed by Fannie Mae and Freddie Mac. They have many traits that differ from non-conforming loans:

  • Loans must be for $548,250 or less in 2021, or for $647,200 or less in 2022.
  • The down payment may be as low as 3% of the price of the home.
  • The down payment and closing costs may be gifted to you by others.
  • The borrower’s credit score can be no lower than 620.
  • The debt-to-income ratio must be no higher than 50% in most cases, although some lenders use 43% as a common threshold figure.

Conforming loans have some perks over non-conforming loans:

  • Flexibility: Conforming loans have to conform to the same standards across many financial institutions, so the borrower often has a choice of lenders.
  • Lower interest rates: The interest rates of conforming loans are mostly lower than the interest rates of non-conforming loans.

Key Takeaways

  • A non-conforming loan falls outside the rules prescribed by Fannie Mae and Freddie Mac.
  • This type of loan is also called a jumbo mortgage because of its size.
  • Private lenders issue these types of loans and make their own rules for them.
  • You'll need a nearly perfect credit history to qualify for a non-conforming loan.
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Housing Finance Agency. “FHFA Announces Conforming Loan Limits for 2022.” Accessed Jan. 9, 2022.

  2. Federal Housing Finance Agency. "FHFA Announces Conforming Loan Limits for 2021." Accessed Jan. 9, 2022.

  3. myFICO. "What Credit Score Do You Need To Buy a House?" Accessed Jan. 9, 2022.

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