Non-Conforming Loan: What Is It and How It Differs from a Conforming Mortgage

By: Craig Berry Reviewed By: Jon Meyer
March 15, 2023 - 6 min read

Buying a home is an exciting time but navigating the complexities of your mortgage loan options can leave you feeling overwhelmed. So how do you decide if a non-conforming loan is right for your situation?

To help, here’s our guide to this special type of mortgage. Read on to discover how non-conforming loans work, what makes them unique, and when applying for one would be most suitable.

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How does a non-conforming loan work?

A non-conforming mortgage is a loan that doesn’t adhere to Fannie Mae and Freddie Mac’s standards for purchase. The most common types of non-conforming loans are government-backed mortgages. These include Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans, U.S. Department of Agriculture (USDA) loans, and jumbo loans above Fannie Mae and Freddie Mac limits.

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There are several factors that go into whether or not you may qualify for a non-conforming loan. These include the price of the property, loan size, interest rate, as well as your down payment, debt-to-income ratio, and credit score.

For example, VA loans require zero down payment, while jumbo loans typically require 20% down. FHA loans have less stringent credit requirements than jumbo loans, which typically require higher credit scores.

Conforming vs non-conforming mortgage: What’s the difference?

The main differences that make a loan conforming vs non-conforming come down to the amount of money you are borrowing, and eligibility requirements.

For example, conforming loans have a loan limit set by the Federal Housing Finance Agency (FHFA). For 2023, the limit is $ in most parts of the U.S. This limit is higher in certain high-cost regions where the number is $1,089,300 for a 1-unit property.

If you need to borrow more than $, you’ll need a non-conforming loan known as a jumbo loan.

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Depending on the type of non-conforming loan you need, eligibility requirements tend to be more strict. That’s because they require lenders to take on greater risk when issuing a mortgage. This is especially true when it comes to jumbo loans.

Lenders have their own requirements for non-conforming loans, but you’ll likely need a higher credit score, a lower debt-to-income ratio, and a larger down payment than a conforming mortgage.

Types of non-conforming loans

Non-conforming loans commonly include jumbo loans (those above Fannie Mae and Freddie Mac limits) and government-backed loans like VA, FHA, or USDA loans.

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Jumbo loans

If the loan amount you’re applying for exceeds the limits of a conforming loan, you’ll need a jumbo loan. Jumbo loans require higher down payments (typically 20%). They have tougher credit guidelines and lower debt ratio thresholds than conforming loans. Additional documentation is often required for jumbo loans.

Government loans

A government loan is one that is issued by a private lender and backed by the federal government. Loans that fall into these categories include FHA, VA, and USDA.

  • FHA loans. These mortgage loans offer competitive rates, less stringent credit standards and usually follow most conforming guidelines. FHA loans are also known for having low down payment requirements – typically as low as just 3.5%.
  • VA loans. Veteran Affairs mortgages are known for having a zero down payment requirement and lower interest rates. VA mortgages are also known for having more straightforward credit requirements.
  • USDA loans. For homebuyers looking to purchase a home in rural areas, USDA loans can be ideal. With no down payment requirement, and the possibility of rolling some or all closing costs into the mortgage, USDA loans are a popular option.

Other types of non-conforming loans

Non-QM Loans

Another type of non-conforming loan is a non-QM loan. Non-QM mortgages are non-qualified loans that do not conform to the consumer protection provisions of the Dodd-Frank Act. These loans are typically for mortgage borrowers who can’t prove their income in traditional manners, or borrowers who have credit challenges. Non-QM mortgages almost always require a higher down payment and come with higher interest rates.

Interest-only Loans

An interest-only mortgage is a loan with scheduled payments that require you to pay only the interest for a specified amount of time. Usually, interest-only loans are structured as a particular type of adjustable-rate mortgage. Interest-only loans can be enticing due to their lower initial payments. However, you won’t be building equity while making interest-only payments, and you could have a big payment increase when the interest-only period ends.

Hard Money Loans

A hard money loan is a short-term loan offered by individuals or private companies that accept property or an asset as collateral. These loans are typically more of a last resort when it comes to buying a home, as they come with higher rates, greater costs, and less favorable terms.

Pros of non-conforming loans

Non-conforming loans can be a great option for home buyers who don’t qualify for a conforming mortgage. Some of the benefits of non-conforming loans include the following:

  • Higher loan amounts (jumbo loans).
  • You may be able to buy different types of property than with a standard conforming loan.
  • It’s possible to still get a mortgage, even with a recent bankruptcy or other credit challenges.
  • Non-conforming loans can be ideal if you’re looking for a government-backed loan, including FHA, VA, or USDA.
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Cons of non-conforming loans

Non-conforming loans, especially jumbo and non-QM mortgages, can present a higher risk for lenders. As such, your lender may compensate with tougher and more expensive requirements, making these loans harder to qualify for. Here are some disadvantages of non-conforming loans:

  • Unless you’re using a government loan, non-conforming loans often have higher interest rates, more expensive fees, and larger down payment requirements.
  • More stringent underwriting standards (except a government loan).
  • Fewer options to choose from, which could make it more difficult to shop and compare quotes.
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Non-conforming mortgage limits 2023

Each year, the Federal Housing Finance Agency (FHFA) announces the conforming loan limits for the following year. The conforming limit is the maximum loan amount Fannie and Freddie can lend.

The current loan limits are $ for mortgages in areas where home prices are below or near the national average but they can go as high as $1,089,300 in high-cost regions.

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Conforming vs non-conforming mortgage: Which is best for me?

If you qualify for a conforming loan, you can typically expect the most favorable terms. However, many non-conforming loans, such as FHA, VA, and USDA loans, offer exceptional benefits to mortgage borrowers.

At the same time, there are many non-conforming loan options that could be the difference in whether or not you get into a new home this year. These types of loans can help fill a mortgage loan gap for many home buyers. If you have a unique need or situation, your only choice may be to get a non-conforming mortgage.

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Remember that not all mortgage lenders are created equal. If you need a non-conforming loan, shop around until you find a trusted and knowledgeable lender who can provide an affordable solution.

Non-conforming loans FAQs:

What is a non-conforming conventional mortgage?

Conventional loans are simply mortgage loans not backed by a government agency. So, both conforming and non-conforming loans can be conventional loans. Jumbo loans are an example of conventional, non-conforming loans.

Is a conforming loan the same as a conventional loan?

All conforming loans are a type of conventional mortgages not backed by a government agency. Not all conventional loans, though, are considered conforming loans. Jumbo loans, for example, are non-conforming conventional loans, while loans under the jumbo limit can be conforming conventional loans.

Is a conforming or non-conforming loan better?

Unless you’re looking for a government-backed mortgage loan, such as a VA or FHA loan, you’ll typically find conforming loans to offer more favorable terms. They’re generally less expensive. If you’re borrowing a higher loan amount, a non-conforming loan may not only be better, but it could also be your only option.

Can you refinance a non-conforming loan?

Yes. You can refinance a non-conforming loan. Assuming there’s no pre-payment penalty, you can typically refinance any type of mortgage.

Can non-conforming loans be sold to Fannie Mae or Freddie Mac?

No. Only loans that “conform” to the Federal Housing Finance Agency (FHFA) standards can be sold to Fannie or Freddie.

Is a jumbo loan considered a non-conforming loan?

Yes. A jumbo loan is simply a conventional loan that is considered non-conforming because it exceeds conforming loan limits.

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Craig Berry
Authored By: Craig Berry
The Mortgage Reports contributor
With over 20 years in mortgage banking, Craig Berry has helped thousands achieve their homeownership goals.
Jon Meyer
Reviewed By: Jon Meyer
The Mortgage Reports Expert Reviewer
Jon Meyer is a mortgage loan officer (NMLS #1590010) with over five years in the lending industry. He currently works at Supreme Lending in Mill Valley, CA (NMLS #2129) and has served as an expert adviser for The Mortgage Reports’ editorial team.