A non-conforming loan is a mortgage that fails to meet the criteria for a conforming loan set by Fannie Mae and Freddie Mac. Reasons include the loan amount being higher than the conforming limit, which is $726,200 in most U.S counties, or the lack of sufficient credit or the unorthodox use of funds or collateral. As a result, you may still be able to buy a home with a non-conforming loan if you have a negative mark on your credit report, such as a bankruptcy. Keep in mind that these loans also often have higher interest rates.
Non-conforming loans are not eligible for insurance through government programs and are part of the private lenders' investment portfolios. They are generally riskier for investors and follow different underwriting guidelines. They may allow borrowers to purchase more expensive properties.
Benefits of taking out a non-conforming loan include:
Lower down payment requirements: Non-conforming government-backed loans usually have lower down payment requirements than conventional loans. You can buy a home with 0% down if you qualify for a USDA or VA loan.
Larger loan limits: You may have no choice but to choose a non-conforming jumbo loan if you want to buy an expensive property. Jumbo loans give you access to higher loan maximums than conforming loans.
More types of property: Depending on the type of loan you take, a non-conforming loan may allow you to buy a type of property you can’t get with a conforming loan.
Lower credit: Many lenders offer customized non-conforming loan solutions to people with negative marks on their credit report. For example, you won’t be able to get a conforming loan for several years if you have a bankruptcy on your credit report. However, your lender may offer you an individualized non-conforming solution. Keep in mind you’ll almost always pay more in interest for these loans.