Nonconforming loans: What are they and how do they work?

There are many types of mortgages to choose from when buying a home. The most common choice is the conforming conventional loan. Anything else is a nonconforming loan. This includes government-backed mortgages such as FHA, VA, and USDA loans, which are designed to help specific types of borrowers afford a home. It also includes jumbo loans, which exceed conforming loan limits are used to buy more expensive homes.

What is a nonconforming loan?

A nonconforming loan is any mortgage that does not meet conforming loan requirements. So, what is a conforming loan?

A conforming conventional loan meets specific requirements that allow the lender to sell it to Fannie Mae or Freddie Mac. Those requirements include a maximum loan amount. Conforming loan limits are set by the Federal Housing Finance Agency. The limit for 2025 is $806,500 in most counties and $1,209,750 in high-cost areas.

http://Borrowers must have a credit score of at least 620 for a fixed-rate loan and 640 for an adjustable-rate loan. They also need a debt-to-income ratio of 45% or less, and a down payment of at least 3% for a fixed-rate mortgage and 5% for an ARM. Borrowers who put down less than 20% must pay for private mortgage insurance until they have at least 20% equity in the home.

How are conforming and nonconforming loans different?

Any loan that's not a conforming loan is a nonconforming loan.

The most common types of nonconforming loans are government-backed loans – primarily those offered by the Federal Housing Administration, Veterans Affairs, and U.S. Department of Agriculture – and jumbo loans, which exceed the conforming loan limit.

For example, in most places, the maximum amount for a conforming loan is $806,500. If you needed to borrow more than that, you'd need a jumbo loan, which is nonconforming.

Other nonconforming loans are specialized mortgages for buyers with specific needs, such as those who wish to buy a multi-use property rather than a typical single-family home.

How does a nonconforming loan work?

Depending on your situation, finances, credit, and the property you want to buy, nonconforming loans may be your only option.

Keep in mind that nonconforming loans aren't necessarily a bad thing or worse than a conforming loan. It's just that Fannie Mae and Freddie Mac can't purchase them on the secondary market. For example, USDA and VA loans are nonconforming, but they offer useful benefits, such as not requiring a down payment.

FHA loans are also nonconforming, but they're helpful for people with lower credit scores. Jumbo loans may be a good choice if you want to buy an expensive property.

Nonconforming loans are more flexible, so borrowers can better tailor loans to their specific situations and needs, even if the government-sponsored enterprises won't buy them later. If you don't qualify for a conventional loan, nonconforming loans can be a good alternative.

Types of nonconforming loans

There are many different types of nonconforming loans. Each is designed for a different situation. In general, there are two categories of nonconforming loans: government-backed and jumbo.

Government-backed loans

Government agencies provide mortgage programs designed to help specific types of buyers afford a home. Private lenders offer loans that meet federal standards. In return, the government insures those loans and compensates lenders in case the borrower defaults.

The most common government-backed loans are.

• VA loans. The VA offers mortgages to active-duty military personnel, veterans, and their surviving spouses. VA loans require no down payment and no minimum credit score. However, lenders can set their own credit score requirements. Rocket Mortgage^®, for example, requires a minimum FICO^® Score of 580 for a VA loan.
• FHA loans. FHA loans are aimed at borrowers with lower credit scores. Rocket Mortgage offers FHA loans with a 3.5% down payment to borrowers with a credit score of at least 580. Other lenders may offer FHA loans to borrowers with a credit score between 500 and 579 and a 10% down payment.
• USDA loans. USDA loans are available to low- to mid-income borrowers buying a home in an eligible rural area. No down payment is required. Borrowers must have a credit score of at least 640 and can't earn more than 115% of the county's median income. The home they're buying can't be a working farm. Rocket Mortgage doesn't currently offer USDA loans.

Jumbo loans

Jumbo loans are mortgages that exceed the conforming loan limits and are used to buy more expensive homes. A jumbo loan can be for amounts exceeding $1 million, $2 million, or more.

Lenders take more risk with jumbo loans because they can't sell them to Fannie Mae or Freddie Mac. This means each lender is free to set its own requirements for a jumbo loan. Borrowers often need a higher credit score, lower DTI ratio, and larger down payment for a jumbo loan. Interest rates may also be higher.

Other nonconforming loan types

There are less common types of nonconforming loans designed for borrowers in specific situations where conforming loans won't work. These also are known as nontraditional mortgages.

Rocket Mortgage does not offer any of the following loans, but the information is helpful for understanding nonconforming loans.

• Holding mortgage: With a holding mortgage, the seller acts like a lender to the home buyer. The buyer pays the seller monthly, and the seller retains title to the property until the buyer pays off the loan.
• Hard-money loan: Individuals or private companies offer hard-money loans. 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.

Benefits of nonconforming loans

Nonconforming loans can be helpful for people who want to take advantage of a government loan program or who don't qualify for a conforming loan. When applying, consider these benefits.

• A more flexible down payment requirement. Nonconforming government-backed loans may have a lower down payment requirement than conventional loans.
• Larger loan limits. You may have no choice but to choose a nonconforming jumbo loan if you want to buy an expensive property. Jumbo loans provide access to higher loan amounts than conforming loans.
• More types of properties. Depending on the type of nonconforming 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 nonconforming loans if you have negative marks on your credit report. For example, you might be ineligible for conforming loans with a bankruptcy on your credit report. However, your lender may offer you a nonconforming solution in the form of a government-backed loan.

The bottom line: Nonconforming loans could provide financing when conforming loans don't

Any mortgage that doesn't meet the requirements for a conforming conventional loan is a nonconforming loan. This includes government-backed mortgages such as VA, FHA, and USDA loans, as well as jumbo loans. If you're looking to buy a home and find yourself unable to qualify for a conforming loan for one reason or another, consider applying for a nonconforming loan.

If you're ready to explore your borrowing options, apply today with Rocket Mortgage.

Rocket Mortgage is a VA-approved lender, not endorsed or sponsored by the Dept. of Veterans Affairs or any government agency.