Definition
A non-conforming loan is a mortgage that does not meet the guidelines set by Fannie Mae and Freddie Mac, typically due to loan amount, borrower credit profile, or unique property type. These loans are often provided by private lenders and may have higher interest rates and stricter terms.
Explanation
Loans that meet Fannie Mae and Freddie Mac’s requirements are called conforming loans and are eligible for government backing. Non-conforming loans do not meet these criteria and include:
- Jumbo Loans – Loans exceeding the conforming loan limit ($766,550 in most areas for 2024).
- Portfolio Loans – Loans that lenders keep in-house rather than selling to investors.
- Bank Statement Loans – Designed for self-employed borrowers who qualify based on bank deposits rather than tax returns.
- Foreign National Loans – Mortgages for non-U.S. residents without Social Security numbers.
- Fix-and-Flip Loans – Short-term loans for investors renovating and reselling properties.
Because non-conforming loans pose higher risk to lenders, they often have:
- Higher interest rates than conforming loans.
- Larger down payment requirements (e.g., 20%–30%).
- Stricter underwriting (proof of income, reserves, and creditworthiness).
Example
A homebuyer in Los Angeles wants to purchase a $2 million home. Since the loan amount is above the conforming limit ($1,149,825 for 2024 in high-cost areas), they must take out a jumbo loan, which requires a 25% down payment and a credit score of 700+.