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Non-Conforming Loans: What Are They And How Do They Work?

Hanna Kielar7-minute read

January 12, 2023


*As of July 6, 2020, Rocket Mortgage® is no longer accepting USDA loan applications.

If conventional loans aren’t an option for you, a non-conforming loan may be able to help you get financing for the home of your dreams. But what exactly is a non-conforming loan, and what are the benefits of having one?

In this article, we’ll cover what you need to know about non-conforming loans and explain their different types.

What Is A Non-Conforming Loan?

A non-conforming loan is a loan that doesn’t meet Fannie Mae and Freddie Mac’s standards for purchase. Fannie Mae and Freddie Mac are government-sponsored enterprises that invest in mortgage loans. The rules for what types of mortgages Fannie Mae and Freddie Mac can buy come from the Federal Housing Finance Agency (FHFA). There are two main reasons why a loan might not conform: it doesn’t meet a requirement set by the FHFA, or the loan is too large to be considered a conforming loan.

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How Does A Non-Conforming Loan Work?

There are many instances where your only choice will be to get a non-conforming loan. If you want to buy a home with no down payment, you can do so if you qualify for a VA loan (one of the top benefits of military service) or you live in a rural area and qualify for a USDA loan. FHA loans are the best choice for clients who want a mortgage with lower credit requirements. On the other end of the spectrum, your lender will require you to take out a non-conforming jumbo loan if you want to buy a more expensive home.

Beyond that, non-conforming loans work best for people who have negative marks on their credit but still want to buy a home or refinance. Many lenders offer personalized solutions to people who don’t qualify for conforming loans because of bankruptcies or other negatives on their credit. A non-conforming loan might be right for you if you don’t qualify for both a government-backed loan and a conforming conventional loan.

Types Of Non-Conforming Loans

Unlike conforming loans, there are a few different types of non-conforming loans. The main two types of non-conforming loans are government-backed loans and jumbo loans. Let’s take a look at them and their criteria for borrowers.

Government-Backed Loans

Government-backed loans are loans insured by the federal government. In other words, the government foots the bill and helps cover any losses from a loan default. Government-backed loans are less risky for investors. As a result, they can help buyers with lower down payments and credit scores. However, you and your home need to meet a certain set of criteria to qualify for a government-backed loan.

There are three types of government-backed loans: VA loans, USDA loans and FHA loans. Each loan type has its own individual qualification criteria.

  • VA loans: VA loans are loans for qualified members of the armed forces, veterans and their spouses. You must meet minimum service requirements or be a surviving spouse of a service member who lost their life in the line of duty or as a result of a service-connected disability. A VA loan allows you to purchase a home with no down payment. You can also refinance 100% of your home’s value with a minimum credit score of 620. Although the VA doesn’t set specific requirements for minimum credit scores, lenders can set their own guidelines. Rocket Mortgage requires a minimum median FICO® Score of 580 or higher. VA loans are insured by the Department of Veterans Affairs.

  • FHA loans: FHA loans allow you to buy a home with as little as 3.5% down. You must have a median credit score of at least 580 and a qualifying debt-to-income ratio (DTI). If you have a median FICO® Score of 620 or higher, you may qualify with a slightly higher DTI. FHA loans are insured by the Federal Housing Administration.

  • USDA loans: USDA loans are loans for buyers who want to purchase a home in a rural or suburban area. Your home must be in an area the USDA deems to be sufficiently rural. You also can’t earn more than 115% of your county’s median income, and your home can’t be a working farm. You can buy a home with $0 down and have a median credit score of as low as 640. USDA loans are insured by the United States Department of Agriculture. Rocket Mortgage does not currently do USDA Loans.

Jumbo Loans

You’ll need a jumbo loan if you want a loan that’s too large for Fannie Mae or Freddie Mac’s maximum loan amounts. The good news is that jumbo loans don’t usually have higher interest rates compared to conforming conventional loans.

However, jumbo loans often have stricter qualification criteria. You’ll need a lower debt-to-income (DTI) ratio and a higher credit score to qualify for one. Individual lenders set their own standards on qualifications and how much you can take out in a jumbo loan.

Other Non-Conforming Loan Types

Besides government-backed loans and jumbo loans, there are a few other non-conforming loan types to consider depending on your situation. Rocket Mortgage does not offer these loans, but we’re providing this information to help you understand non-conforming mortgages.

  • Holding mortgage: A holding mortgage is when the seller acts like a lender to the home buyer. The buyer makes monthly payments to the seller, who holds onto the property title until the loan is paid in full.
  • Hard money loan: A hard money loan is a short-term loan offered by individuals or private companies that accept property or an asset as collateral.
  • Purchase money mortgage: A purchase money mortgage is common for buyers who don’t qualify for standard bank financing. The purchase money mortgage, otherwise known as owner/seller financing, is a loan from the seller that’s given to the buyer.
  • Interest-only mortgage: An interest-only mortgage is when you only pay interest on the loan for a set period of time. Adjustable-rate and fixed-rate are the two types of interest-only mortgage.

Benefits Of Non-Conforming Loans

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.

The Bottom Line: Is A Non-Conforming Loan Right For You?

A non-conforming loan doesn’t meet Fannie Mae and Freddie Mac’s purchase standards and may have lower down payment and credit requirements. 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.

If you’re looking for a mortgage, check out our article on different types of mortgages to decide which is best for you and your financial situation.

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Hanna Kielar Headshot

Hanna Kielar

Hanna Kielar is a Section Editor for Rocket Auto, RocketHQ, and Rocket Loans® with a focus on personal finance, automotive, and personal loans. She has a B.A. in Professional Writing from Michigan State University.