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

Jan 31, 2024



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

If a conventional conforming loan isn’t an option for you, a non-conforming loan – conventional or otherwise – may be able to help you finance your dream home. But what exactly is a non-conforming loan, and what are the benefits of having one?

Let’s walk through what you need to know about non-conforming loans and look at some non-conforming loan options.

What Is A Non-Conforming Loan?

A non-conforming loan is one that doesn’t meet Fannie Mae and Freddie Mac’s standards for a home purchase. Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that invest in mortgage loans. The Federal Housing Finance Agency (FHFA) sets the rules for the type of mortgages that Fannie Mae and Freddie Mac can buy.

A loan might not conform for two main reasons: One is that it doesn’t meet a requirement set by the FHFA; the other is that the loan is too large to be considered a conforming loan.

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How Does A Non-Conforming Loan Work?

In many instances, your only real choice for a mortgage loan program may be a non-conforming loan. For example, if you want to buy a home with no down payment, you’ll need to do so by qualifying for a non-conforming VA loan (one of the top benefits of military service) or a non-conforming USDA loan (if you live in a rural area).

A non-conforming FHA loan is the best choice if you want a home loan with a more relaxed credit score requirement. On the other hand, your lender may require you to take out a non-conforming jumbo loan if you buy a super-expensive home.

Many lenders offer personalized solutions to those who don’t qualify for conforming loans because of bankruptcies or other derogatory marks on their credit.

A non-conforming government-backed loan might be right for you if you don’t qualify for a conforming conventional loan.

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Types Of Non-Conforming Loans

Unlike conforming loans, non-conforming loans come in multiple forms. The two main categories of non-conforming loans are government-backed loans and jumbo loans. Let’s dig into both.

Government-Backed Loans

Government-backed loans are 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 lenders, but you and your home need to meet certain criteria to qualify for a government-backed loan.

You’ll find three types of government-backed loan programs: VA loans, USDA loans and FHA loans. Each loan type has its own requirements for loan approval.

  • VA loans: VA loans are for active-duty service members, veterans, members of the U.S. Army Reserve and National Guard, and surviving spouses. To qualify, you must meet minimum service requirements or be the surviving spouse of a service member who lost their life in the line of duty or as a result of a service-related A VA loan lets you buy a home with no down payment and finance 100% of your purchase price.
    The Department of Veterans Affairs (VA) insures VA loans. The VA isn’t a lender, however, so this government agency doesn’t set a specific minimum credit score for a VA loan. Instead, lenders can set their own guidelines. Rocket Mortgage requires a minimum median FICO® Score of 580 or higher for a VA loan.
  • FHA loans: FHA loans let you put only5% down if you 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 a popular choice for first-time home buyers, but being a first-time home buyer isn’t required. The Federal Housing Administration (FHA) insures FHA loans.
  • USDA loans: USDA loans are for buyers who want to purchase a home in a rural or suburban area that the United States Department of Agriculture (USDA) deems eligible. You also can’t earn more than 115% of your county’s median income, and your home can’t be a working farm. The USDA, which insures the loan, lets a borrower buy a home with $0 down and a median credit score as low as 640. Rocket Mortgage doesn’t currently offer USDA Loans.

Jumbo Loans

You’ll need a jumbo loan if you want a loan that exceeds the FHFA’s conforming loan limits. The good news is that a jumbo loan doesn’t usually have a higher interest rate than a conforming conventional mortgage.

However, a jumbo mortgage usually has stricter qualification criteria, as you’ll likely need a lower DTI and a higher credit score to qualify for one. Individual lenders set their own eligibility criteria and loan size limits for jumbo loans.

Other Non-Conforming Loan Types

You may want to consider a few other non-conforming loan types, depending on your situation. Rocket Mortgage doesn’t offer the loans we’ll mention next, but we’re providing some information on them so you’ll have an even better understanding of non-conforming mortgages.

  • Holding mortgage: With a holding mortgage, 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 offered by individuals or private companies. In this case, the individual or company accepts property or an asset as collateral on the loan.
  • Purchase-money mortgage: A purchase-money mortgage is most common among buyers who don’t qualify for standard bank financing. This mortgage, also known as owner/seller financing, is a loan the seller provides to the buyer.
  • Interest-only mortgage: With an interest-only mortgage, you make interest-only payments on the loan for a set period of time.

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Benefits Of Non-Conforming Loans

Benefits of taking out a non-conforming loan include:

  • A more flexible down payment requirement: Non-conforming government-backed loans have a lower down payment requirement than conventional loans, in many cases.
  • Larger loan limits: You may have no choice but to choose a non-conforming jumbo loan if you want to buy an especially expensive property. Jumbo loans provide access to higher loan amounts than conforming loans.
  • More types of property: Depending on the type of non-conforming loan you get, you may be able to buy a property you couldn’t get with a conforming loan.
  • A more flexible credit requirement: 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 in the form of a government-backed loan.

The Bottom Line

A non-conforming loan doesn’t meet Fannie Mae and Freddie Mac’s purchase standards. In the case of non-conforming loans backed by the federal government, a non-conforming loan may also have more relaxed down payment and credit requirements. As a result, even if you have a negative mark on your credit report, you may still be able to buy a home or do so more quickly than you otherwise would.

If you’re ready to see what type of mortgage you qualify for, start a loan application and let our team help you find the best option for your needs.


Victoria Araj

Victoria Araj is a Section Editor for Rocket Mortgage and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.