There’s a lot of vocabulary in the mortgage process, and it’s important to know your terminology. For example, construction of the Batcave was probably too expensive for Bruce Wayne to get a conforming loan – not that the multi-billionaire founder of Wayne Enterprises needs one, but we digress.
If you’re looking to buy or refinance a home, it’s important to understand some of this mortgage lingo. What is a non-conforming loan, and how does it differ from a conforming mortgage? Would it really be the best choice for Batman?
Let’s dive in and find out.
What Is A Non-Conforming Loan?
Non-conforming loans are loans that aren’t bought by Fannie Mae or Freddie Mac. The most common types are government-backed mortgages – like FHA, USDA and VA loans – and jumbo loans.
What makes a loan non-conforming? Reasons can vary, but might include:
- Lower minimum credit requirements
- Lower minimum down payment requirements
- Higher debt-to-income ratio (DTI) allowances
- High loan limits (for jumbo loans)
Government loans can be a good choice if you don’t qualify for a conforming loan, while jumbo loans can help you get a mortgage higher than the conforming limit.
Conforming Vs. Non-Conforming Loans
The best way to understand what a non-conforming loan is might be to talk about what it isn’t: namely, a conforming loan.
A conforming loan is one that meets the requirements to be sold to Fannie Mae or Freddie Mac. To be sold to one of these investors, the loan must meet certain rules set by the Federal Housing Finance Agency (FHFA). These rules are what differentiate conforming and non-conforming loans.
2021 Loan Limits
The first big difference between a conforming and a non-conforming loan is the loan’s limits, which vary by state and county. Below are the conforming loan limits for 2021.
- For the lower 48 states, the maximum amount on a regular loan for a one-unit property is generally $548,250.
- For Alaska, Hawaii and certain high-cost counties, the maximum is $822,375.
- In no instance will the mortgage amount you can get for a one-unit property be higher than $822,375 on a conforming loan.
- If you’re buying a multi-unit home, higher limits do apply.
- Anything above county limits is a jumbo loan and, thus, non-conforming.
To get a conforming loan, you must meet the credit guidelines of the agency that’s buying the loan. For conventional loans, Fannie Mae and Freddie Mac accept a median FICO® Score of 620 or higher. A non-conforming loan like one offered by the FHA will typically not require such a high score.
Conforming loans require a DTI below 50%. Non-conforming loans vary with respect to this requirement. A jumbo loan typically requires a lower DTI, while you may be able to get an FHA loan with a higher DTI.
LTV affects your down payment. For conforming loans, you’ll need an LTV of no more than 97%, which equates to a 3% down payment. Again, this varies for non-conforming loans. A jumbo loan typically requires a higher down payment, while government-backed loans may ask for less.
Types Of Non-Conforming Loans
Non-conforming loans break down into a few different categories. Let’s review them.
Government loans are backed by the federal government. When we speak of these loans, mortgage lenders are referring to those created by the FHA, USDA and VA, and these loans each come with their own respective requirements and benefits.
- Minimum FICO® score of 580 or higher, depending on your DTI
- Minimum down payment of 3.5%
- Minimum FICO® Score of 640 or higher with most lenders
- No down payment required
- Intended for those in rural areas or on the outskirts of the suburbs
- Household income must be below 115% of the area median
- Not currently offered by Rocket Mortgage® at this time
- Median FICO® Score of 620 for Rocket Mortgage clients
- No down payment required
- Available for eligible active-duty servicemembers, reservists, veterans and surviving spouses of those who passed in action or as a result of a service-connected disability.
Another common type of non-conforming loan is a jumbo loan, which comes with higher loan limits. At Rocket Mortgage, we do loans with limits of up to $2.5 million. (And that’s why, to bring back the analogy from earlier, you can see why a non-conforming jumbo loan would probably be Bruce Wayne’s best bet to mortgage the Batcave.)
The good news is that jumbo loans typically come with similar rates to any other loan. There are just a couple of things you need to know:
- Your DTI has to be lower than it would be on a regular loan (45% is our starting point).
- You’ll need a down payment of at least 10.01%, maybe more depending on the loan amount and your credit score.
- We require a minimum median FICO® Score of 700 for loans up to $1 million. Higher loan limits will have more stringent credit requirements.
- Your lender may require additional documentation due to the size of the loan.
Other Types Of Non-Conforming Loan
Beyond government and jumbo, there are other types of non-conforming loans that might allow you to:
- Buy a piece of property that you otherwise couldn’t with a conforming loan
- Buy a home with a derogatory credit item such as a recent bankruptcy
- Get a tailored product from your lender to meet your unique goals
The Pros And Cons Of Non-Conforming Loans
Trying to figure out which loan is right for you? Here’s how non-conforming mortgages stack up to conforming loans.
When it comes to non-conforming loans, there are three big benefits:
- Higher loan amounts are available in the case of jumbo loans.
- Depending on the loan option, you might be able to buy different types of property than you could with a standard conforming loan.
- You might be able to get a non-conforming loan if you have a negative mark on your credit, like a recent bankruptcy.
Unlike conforming loans, non-conforming loans:
- Are offered by fewer lenders, which may limit your ability to shop around
- May come with a higher interest rate
- Have less standardization from lender to lender
The Bottom Line: Non-Conforming Doesn’t Mean Non-Starter
While “non-conforming” might initially sound intimidating, all it means is your loan won’t be purchased by Fannie Mae or Freddie Mac. For many home buyers, non-conforming loans are a way to secure a loan outside of typical conforming requirements.
Ready to see your personalized loan options? Apply online with Rocket Mortgage to find out more and determine the best choice for you.
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