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Non-Conforming Loan: What It Is And How It Differs From A Conforming Mortgage

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Published on November 15, 2021
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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 multibillionaire 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 do not conform to the guidelines of Fannie Mae or Freddie Mac. The most common types of non-conforming loans are government-backed mortgages – like FHA, USDA and VA loans – and jumbo loans that are above Fannie Mae and Freddie Mac limits.

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.

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Conforming Vs. Non-Conforming Loans

The best way to understand what a non-conforming loan is might be to talk about how it differs from a conforming loan.

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.

2022 Loan Limits

The first big difference between a conforming and a non-conforming loan is the loan’s limit, which varies by state and county. Below are the conforming loan limits for 2022.

  • For the lower 48 states, the maximum amount on a regular loan for a one-unit property is generally $647,200.
  • For Alaska, Hawaii and certain high-cost counties, the maximum is $970,800
  • If you’re buying a multi-unit home, higher limits do apply.
  • Anything above county limits is a jumbo loan and, thus, non-conforming.

Credit Score

To get a conforming loan, you must meet the credit guidelines of the agency that’s buying the loan. For example, in 2022 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.

Debt-To-Income Ratio

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.

Loan-To-Value Ratio

Your loan-to-value ratio (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, an FHA loan allows LTV up to 96.5% and VA loans usually offer LTV up to 100%.

Types Of Non-Conforming Loans

Non-conforming loans break down into a few different categories. Let’s review them.

Government Loans

Government loans are backed by the federal government. When it comes to these loans, mortgage lenders are referring to those insured by the FHAUSDA and VA, and these loans each come with their own respective requirements and benefits.

FHA Loans

  • Minimum FICO® score of 500 or higher, depending on your DTI
  • Minimum down payment of 3.5%

USDA Loans

  • 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

VA Loans

  • No minimum credit score required by the VA, but Rocket Mortgage clients must have a median FICO® Score of 580 
  • No down payment required
  • Available for eligible active-duty service members, reservists, veterans and surviving spouses of those who passed in action or as a result of a service-connected disability.

Jumbo Loans

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 must be lower than it would be on a regular loan (45% is our starting point).
  • You’ll need a down payment greater than 10%.
  • We require a minimum median FICO® Score of 680.
  • Your lender may require additional documentation due to the size of the loan.

Other Types Of Non-Conforming Loans

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

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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.

Pros

When it comes to non-conforming loans, there are three big benefits:

  • Higher loan amounts are available (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.

Cons

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

Non-Conforming Loan FAQs

It’s common for questions to arise as you begin researching conforming vs. non-conforming loans. To help you with this, we’ve answered a few of the most commonly asked questions regarding non-conforming loans.

Can you refinance a non-conforming loan?

Most loans are eligible for refinancing, including non-conforming loans. If you’re looking to refinance your mortgage for extra cash or to switch your non-conforming loan to a conforming loan, you’ll need to start by finding a qualifying lender that can help you through the process.

Is a conforming or non-conforming loan better?

Choosing between a conforming or non-conforming loan depends on your personal financial situation and which option is best for your needs. While non-conforming loans may help you buy a home with no down payment (if you qualify for a VA loan) and afford more expensive homes through government-backed loan programs, conforming loans also have benefits such as lower interest rates for borrowers with strong credit scores.

Can you use a non-conforming loan to buy a second home?

While you can use some non-conforming loans to purchase a second home, these mortgages do have occupancy rules. Essentially, you’ll need to spend a significant amount of time each year in this home in order to qualify it as a second residence, otherwise you are limited to 14 days of renting to another tenant.

The Bottom Line: Non-Conforming Doesn’t Mean Non-Starter

While “non-conforming” might initially sound negative, all it means is that 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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Kevin Graham

Kevin Graham is a Senior Blog Writer for Rocket Companies. He specializes in economics, mortgage qualification and personal finance topics. As someone with cerebral palsy spastic quadriplegia that requires the use of a wheelchair, he also takes on articles around modifying your home for physical challenges and smart home tech. Kevin has a BA in Journalism from Oakland University. Prior to joining Rocket Mortgage, he freelanced for various newspapers in the Metro Detroit area.