Non-Conforming Loan
Definition and meaning of Non-Conforming Loan in real estate.
A non-conforming loan is any mortgage that does not meet the guidelines or purchasing criteria established by Fannie Mae and Freddie Mac. This typically occurs because the loan amount exceeds conforming limits, which are the maximum sizes of loans these government-sponsored enterprises will buy.
In more detail
The Federal Housing Finance Agency sets conforming loan limits annually, and any loan exceeding this amount is categorized as non-conforming, often called a jumbo loan. These loans cannot be purchased by government-sponsored enterprises, which means lenders must either hold them in their own portfolios or sell them to private investors.
To compensate for this lack of government backing, lenders impose stricter underwriting standards, which is the process of verifying a borrower's credit and assets, on applicants. This often includes requiring larger down payments, higher credit scores, and more significant cash reserves.
Key facts
| Category | Mortgages & Financing |
|---|---|
| Also known as | Jumbo loan |
| Regulated by | Federal Housing Finance Agency |
| Key challenge | Stricter credit and down payment requirements |
A buyer in a high-cost housing market takes out a mortgage that exceeds the federal conforming limit, requiring them to apply for a non-conforming jumbo loan.
Frequently asked questions
What makes a loan non-conforming?
A loan is non-conforming if the size of the loan exceeds federal limits, or if the borrower's credit score, debt-to-income ratio, or documentation is outside standard guidelines.
Do non-conforming loans have higher interest rates?
They can carry higher interest rates due to the increased risk for lenders, but rates can also be competitive depending on market conditions.