Trustpilot
Loading...
Loading...Loading...If a mortgage doesn't meet Fannie Mae and Freddie Mac's size, credit, or underwriting standards, it's a non-conforming loan.
A non-conforming loan is a mortgage that doesn't fit the criteria Fannie Mae and Freddie Mac use when buying loans from lenders on the secondary market. That's really what it comes down to. If a loan can't be sold to one of those two government-sponsored enterprises, it's non-conforming.
So what makes a loan "conforming" in the first place? The Federal Housing Finance Agency sets annual limits on how large a mortgage can be for Fannie and Freddie to buy it. For most counties across the country, that cap is $832,750 on a single-unit property. In high-cost areas where home values run higher, the ceiling reaches $1,249,125. Any loan amount above those thresholds automatically becomes non-conforming.
But the size of the loan isn't the only thing that matters. Conforming loans also have to meet certain minimum credit scores, maximum debt-to-income ratios, and down payment amounts. A borrower who doesn't meet any of those requirements might not be able to get a conforming product at all.
A lot of people don't expect this. Loans from the FHA, VA, and USDA are all not conforming. They are backed by the government, which is not the same as being sold to Fannie or Freddie. A lot of buyers think that "government-backed" and "conforming" mean the same thing, but they don't. Those programs are specifically for borrowers who don't meet normal conforming standards, and they do a great job of it.
If you're looking for a mortgage and your situation doesn't meet the requirements, you still have options. You really have more of them than you think.
A lender can sell a conforming loan along with other similar loans to Fannie Mae or Freddie Mac. The sale gives the lender more money so they can give out more mortgages. It's a cycle that keeps the mortgage market going.
Non-conforming loans break that pattern. Lenders either keep them on their own books or sell them to private investors because Fannie and Freddie won't buy them. That changes the math on risk. The lender is taking on more risk, which usually shows up as stricter qualification standards or slightly higher interest rates. Every day at AmeriSave, we help people who need a loan that doesn't fit into the conforming box. The good news is that the non-conforming market has grown enough that competition keeps rates closer to conforming levels than most people think.
The way the process works for you as a borrower isn't very different. You still apply for the loan, get it approved, and close on it. The differences happen behind the scenes in how your lender handles the loan after it closes. The rules you have to follow during underwriting will change, and those rules depend on the type of non-conforming loan you want.
It's important to know why the secondary market is important to you. Lenders can get their money back quickly when they sell conforming loans quickly. This lets them keep giving out new loans at competitive rates. Non-conforming loans go through slower channels. The lender could keep your loan for months or years, or they could sell it to a private investor for a little less than what you owe. That slower cycle is one of the things that causes the differences in rates and fees between conforming and non-conforming products.
Government-backed non-conforming loans are not the same as jumbo loans. The federal insurance or guarantee takes the place of the Fannie and Freddie safety net and gives the lender a different kind of protection. That's why FHA and VA loans can have terms that are sometimes better than those of conforming loans, even though they are not conforming loans. Even though these loans can't be sold through the normal GSE pipeline, the government's support lowers the lender's risk.
Non-conforming loans generally fall into two broad buckets: government-backed loans and jumbo loans. There are also some less common specialty products worth knowing about.
Federal agencies created these programs to help specific groups of borrowers who might struggle to qualify under conventional standards. Private lenders originate the loans, but the government provides insurance or guarantees that protect the lender if the borrower defaults. The three major programs are FHA, VA, and USDA.
FHA loans are insured by the Federal Housing Administration and built for borrowers with lower credit scores or smaller down payments. You can qualify with a credit score as low as 580 and put down just 3.5% of the purchase price. On a $300,000 home, that's $10,500 at closing rather than the $60,000 you'd need for a traditional 20% down payment. The trade-off is mortgage insurance. FHA loans require an upfront mortgage insurance premium of 1.75% of the loan amount plus an annual premium that typically runs between 0.45% and 1.05% depending on your loan term, amount, and down payment size.
VA loans are backed by the U.S. Department of Veterans Affairs and available to eligible active-duty service members, veterans, and surviving spouses. They come with some of the strongest benefits in the mortgage market: no down payment required and no monthly mortgage insurance. The VA does charge a funding fee that ranges from 1.25% to 3.3% of the loan amount depending on your service history and down payment, but that fee can be rolled into the loan. For eligible veterans with full entitlement, there's no cap on how much you can borrow without a down payment.
USDA loans are guaranteed by the U.S. Department of Agriculture and designed for low- to moderate-income borrowers purchasing homes in eligible rural and suburban areas. Like VA loans, USDA loans require no down payment. Borrowers need a credit score of at least 640, and household income can't exceed 115% of the county median. USDA loans carry an upfront guarantee fee of 1% and an annual fee of 0.35% of the remaining loan balance.
A jumbo loan is a mortgage that is bigger than the conforming loan limit. If you need to borrow more than $832,750 to buy a home in most parts of the country, you're in the jumbo range. That limit goes up to $1,249,125 in places where the cost of living is high before a loan becomes a jumbo loan.
Lenders tend to make it harder to qualify for jumbo loans because they can't sell them to Fannie or Freddie. To get a loan, you usually need a credit score of at least 700, a debt-to-income ratio of less than 43%, and a down payment of at least 10% to 20%. After closing, some lenders want you to have cash reserves that can cover six to twelve months of mortgage payments.
Let's look at a real-life example. Let's say you're putting down 20% on a $1,100,000 home. That's a $220,000 down payment and a $880,000 loan amount, which is $47,250 over the limit for conforming loans. If you have a 30-year fixed jumbo loan with a 7% interest rate, your monthly payment for principal and interest is about $5,855. With a conforming loan of $832,750, the payment would be about $5,402 at 6.75%. The extra $453 a month adds up to more than $5,400 in the first year alone. AmeriSave has jumbo loan options and can help you decide if getting a conforming first mortgage and a second mortgage instead of one big loan might save you money.
Beyond government-backed and jumbo products, a handful of specialty non-conforming loans serve borrowers in unusual situations. Interest-only mortgages let you pay just the interest for a set period before principal payments kick in. Hard-money loans are short-term products from private lenders, secured by the property itself and typically used by real estate investors who need fast closings. Seller-financed mortgages bypass traditional lenders entirely, with the property seller acting as the bank. These products carry higher risk and aren't right for most home buyers, but they exist for borrowers whose circumstances don't fit any standard program.
Requirements differ significantly among non-conforming loan categories. That's actually one of their best points. Different programs are better for different types of borrowers, so the qualification bar is set at different levels for each product.
You need a credit score of at least 580 and a down payment of 3.5% for an FHA loan, or 500 and a down payment of 10%. Most lenders won't let your debt-to-income ratio go above 43%, but some will let it go up to 50% if you have strong cash reserves or a history of paying your rent on time. The federal government doesn't set a minimum credit score for VA loans, but most lenders want you to have a score between 580 and 620. USDA loans require a credit score of at least 640 and a debt-to-income ratio of no more than 41%.
The rules for jumbo loans are the strictest. You should have a credit score of at least 700, a debt-to-income ratio of less than 43%, and a down payment of 10% to 20%. Lenders also usually want more paperwork. Get ready to show bank statements, tax returns, and proof of reserves for the last few months. Some jumbo lenders also want to see that you have cash in the bank equal to six or twelve months' worth of mortgage payments after the deal is closed.
Some buyers in the DFW metroplex thought they couldn't get a mortgage because their credit wasn't perfect or they were self-employed. They didn't know that sometimes non-conforming loan programs are more flexible when it comes to paperwork. The AmeriSave team can look at all of your finances and find the right program for you.
The main difference is easy to see. Conforming loans follow the rules set by Fannie Mae and Freddie Mac for buying on the secondary market. Loans that don't conform don't. But that one difference leads to a lot of real-world differences in rates, qualification standards, and the amount you can borrow.
Conforming loans usually have lower interest rates because Fannie Mae and Freddie Mac's demand for them on the secondary market makes them compete with each other. They also tend to have more standardized underwriting. You need a credit score of at least 620, a down payment of at least 3% on a fixed-rate mortgage, and a debt-to-income ratio of 45% or less. You will have to pay private mortgage insurance until you have enough equity if you put down less than 20%.
Non-conforming loans give up some of that rate advantage for more options. Government-backed options make it possible for people with bad credit or little savings to buy a home. Jumbo loans make it possible to buy more expensive homes. Over the years, the extra interest rate you pay for a non-conforming loan has gone down. The Federal Housing Finance Agency says that the average difference between conforming and jumbo rates has been between 0.25 and 0.50 percentage points in the last few quarters. The gap used to be much bigger, which means that the price of going non-conforming isn't as high as it used to be.
There is no one category that is better than the other. Your credit history, how much you need to borrow, and the property you want to buy should all be factors in your decision. AmeriSave can show you options for both conforming and non-conforming products so you can see how much they really cost next to each other.
Not every borrower needs a non-conforming loan, and not every borrower should stay away from one. If you know when these products are useful, you can save time, money, or both.
If the amount of your loan is more than the conforming limit in your area, a non-conforming loan might be the best choice. If your credit score is below 620, you're a veteran or active-duty service member who can get VA benefits, you're buying in a rural area that qualifies for USDA loans, or your income documentation doesn't fit the standard W-2 mold, it's also worth looking into. A lot of self-employed people and small business owners fall into this group because their tax returns don't show how much money they really make.
Ask your lender a few questions before you sign the loan. What will the interest rate be compared to a conforming loan? Should I plan for any upfront costs or mortgage insurance premiums? If my situation changes, can I refinance into a loan that meets the requirements? What are all the costs for the first five years, not just the monthly payment? These questions help you see the whole picture instead of just one number.
Timing is also important. Most years, the conforming loan limit goes up as home prices go up. If your loan amount is only a little bit over the current limit, you might not need a jumbo product at all if you wait a few months for the new limits to take effect. On the other hand, if you qualify for a VA or FHA loan, those benefits don't go away, and all you have to do is wait.
One thing I always tell people who want to buy something is not to be afraid of the word "non-conforming." It's not a judgment of your financial health. It's just a way to explain how the loan fits into the bigger picture of the mortgage system. Some of the best products that are out there don't fit into any of the categories. AmeriSave can help you look at all of your options and choose the one that fits your needs.
Non-conforming loans exist because not every borrower or every property fits inside the conforming loan box. Whether you're looking at an FHA loan to work around a lower credit score, a VA loan that eliminates the down payment, or a jumbo loan to finance a higher-priced home, these products fill real gaps that conforming mortgages can't. The key is understanding what each option costs and what it requires. Talk to a lender who can walk you through the numbers for your specific situation. AmeriSave can help you compare non-conforming and conforming options and find the loan that makes the most financial sense for where you are right now.
A conforming loan is one that follows the rules set by Fannie Mae and Freddie Mac for buying mortgages, such as the limits on the size of the loan set by the FHFA. A non-conforming loan doesn't follow those rules for any reason, like if it's too big, the borrower doesn't have good credit, or the loan is backed by the government instead of GSE. For most counties, the conforming limit is $832,750. In high-cost areas, it is $1,249,125. AmeriSave's mortgage options page shows you all of the products you can choose from if you're not sure which category fits your situation.
Yes, the Federal Housing Administration insures FHA loans, but Fannie Mae and Freddie Mac do not buy them. That means they don't fit into the conforming category, even though they are one of the most popular mortgage products in the country. With FHA loans, people with credit scores as low as 580 and down payments of 3.5% can get a loan. In most cases, they have mortgage insurance for the life of the loan. You can look into the requirements for FHA loans to see if this option is right for you.
It depends on what kind it is. The difference between jumbo loans and conforming loans is getting smaller, but jumbo loans still usually have rates that are 0.25% to 0.50% higher. Because the government backs them, VA mortgages and other government-backed loans can have rates that are as good as or better than those of conforming loans. The lender you choose, your credit score, and your down payment all affect your specific rate. You can start comparing mortgage rates on AmeriSave's current rates page.
There are a lot of different credit score requirements. You can get an FHA loan with a score as low as 580 and a down payment of 3.5%, or as low as 500 and a down payment of 10%. There is no federally required minimum for VA loans, but most lenders want at least 580. Most of the time, USDA loans need 640. Most jumbo loans have a starting amount of 700 or more. The first thing you should do if you're not sure about your credit is get prequalified so you know what programs you can use.
Yes, if your situation changes and you still meet the requirements for conforming at the time of refinancing. You might be able to refinance into a conforming product and lock in a lower rate if your home's value has gone up or the conforming loan limit has gone up enough that your balance is below it. VA borrowers can use the Interest Rate Reduction Refinance Loan to make refinancing easier. The FHA Streamline Refinance is available to FHA borrowers. For more information on the programs that AmeriSave offers, look at their refinance options.
No, not always. It is often easier to get a government-backed non-conforming loan than a conforming loan. FHA and VA loans are easier to get than regular conforming mortgages because they accept lower credit scores and smaller down payments. On the other hand, jumbo loans have stricter requirements because lenders are taking on more risk. It all depends on which non-conforming product you want to qualify for. The loan options page on AmeriSave shows you what each product needs so you can see where you fit.
A jumbo loan is a mortgage that is bigger than the FHFA's limit for conforming loans. You need one if you want to borrow more than $832,750 in most places or more than $1,249,125 in certain high-cost markets. You need to have good credit (usually 700 or higher) and make larger down payments and provide more financial documents to get a jumbo loan. AmeriSave has jumbo loans that can help you buy more expensive homes with terms that are better than those of other lenders.
No. Veterans and active-duty service members who qualify for VA loans can buy a home with no down payment and no monthly mortgage insurance. The VA does charge a one-time funding fee that is between 1.25% and 3.3% of the amount you borrow. This fee depends on your service history and whether you have used the benefit before. Veterans who have disabilities that are related to their service may be able to get a waiver for the funding fee. Find out more about the benefits and requirements for VA loans to see if this program is right for you.
The FHFA says that the high-cost area ceiling is 150% of the baseline conforming loan limit. That means the maximum for single-unit homes in eligible high-cost counties is $1,249,125. Parts of California, New York, and the Washington, D.C., metro area often reach this limit. There are special laws for Alaska, Hawaii, Guam, and the U.S. Virgin Islands that set even higher limits. You can find out the exact limit for your county on the FHFA's conforming loan limit page. Then, you can look at AmeriSave's loan options to see which ones work for you.
No. "Non-conforming" means any loan that doesn't meet the rules for buying by Fannie Mae and Freddie Mac. "Subprime" means loans given to people with bad credit at higher interest rates. A jumbo loan for someone with a 780 credit score is not conforming, but it is not subprime either. The language is often what causes the confusion, but these are two different groups with very different levels of risk. AmeriSave's prequalification tool can help you figure out which programs are right for you based on your credit profile.
Fact Checked