Is A Non-Conforming Loan Right For You?
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 how does it differ from a conforming loan? Great questions.
We’ll cover what you need to know about conforming and non-conforming loans and explain the differences between the two. We’ll also help you decide which loan type is the best fit for you.
What Is A Conforming Loan?
When a loan conforms, it means that it meets 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 and Freddie can buy come from the Federal Housing Finance Agency (FHFA). These are also often referred to as conventional loans.
Most lenders sell your loan to mortgage investors instead of keeping your loan when you get a mortgage. This usually happens within a few months of closing on your loan and allows the mortgage lender to maintain a steady cash flow to offer more mortgages. Lenders have the option to sell your conforming loan to Fannie Mae or Freddie Mac.
Just because your loan is sold doesn’t mean your relationship with your lender ends. Mortgage lenders have the option to retain the servicing rights,which Quicken Loans® keeps for 99% of the loans we originate. This means we collect the monthly payment on behalf of the investor in your mortgage and also maintain your escrow account for property taxes and insurance. Understanding who the servicer is can be very important because these are the people who can help you if you ever have any questions or trouble with your payment.
Types Of Conforming Loans
Only conventional loans can be conforming loans. However, this doesn’t mean that every conventional loan is a conforming loan. Conventional loans need to meet a certain set of standards before they’re eligible for purchase from Fannie Mae or Freddie Mac.
The first guideline is the loan amount. Fannie Mae and Freddie Mac can’t buy your loan if it’s above a certain dollar amount. The highest loan amount you can take out for a conforming loan is $484,350 for a single-unit home in most of the continental United States. The limit gets bumped up to $726,525 if you live in Alaska or Hawaii. In some very high-cost counties a higher limit could be anywhere between the two maximum amounts. You have a non-conforming jumbo loan if you borrow more than the limit. Properties with multiple units have higher conforming loan limits.
In addition, you must meet the other guidelines set by Fannie and Freddie to qualify for a conforming loan. For example, you must have a median FICO® Score of at least 620 to qualify for a conventional conforming loan. Other financial restrictions may also apply and will depend on your specific circumstances.
Benefits Of Conforming Loans
Conforming loans have a few unique benefits, including:
- Standard qualifications: Though individual lenders may set standards that vary, most conforming loans have similar criteria. Shopping for a loan is less stressful and easier once you understand what lenders expect in terms of loan amount and credit score.
- Your choice of lenders: Conforming loans are less risky for lenders because they can sell them to Fannie Mae or Freddie Mac. Therefore, more lenders tend to offer conforming loans compared to non-conforming loans. A conforming loan can open the door to more possibilities if you plan to shop around for lenders and loans as you’re looking to buy a home.
- Lower interest rates: Less risk also means lower interest rates. You may be able to get a lower interest rate when you choose a conforming loan.
What Is A Non-Conforming Loan?
A non-conforming loan is a loan that doesn’t meet Fannie and Freddie’s standards for purchase. There are two main reasons why a loan might not conform: someone else can buy the loan or the loan is too large to be considered a conforming loan.
Types Of Non-Conforming Loans
Unlike conforming loans, there are a few different types of non-conforming loans.
Government-backed loans are loans insured by the federal government. In other words, the government foots the bill and helps cover the lender if you default on your payments. Government-backed loans are less risky for lenders. As a result, they can offer loans to 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 service standards or otherwise be an unmarried widow of a deceased 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. Although the VA doesn’t set specific requirements as far as a minimum credit score, lenders can set their own guidelines. Quicken Loans requires a median FICO® Score of 620 or higher.
VA loans are insured by the Department of Veterans Affairs.
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 at Quicken Loans.
USDA loans are insured by the United States Department of Agriculture.
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 low enough debt-to-income ratio (DTI). If you have a median FICO® Score of 620 or higher, you may qualify with a slightly higher DTI.
You may be able to buy a home with an even lower credit score and a down payment of at least 10%. That said, Quicken Loans doesn’t offer this type of FHA loan.
FHA loans are insured by the Federal Housing Administration.
You have a jumbo loan if you have a loan that’s too large for Fannie Mae or Freddie Mac to buy. 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 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.
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.
When A Conforming Loan Works
Conforming loans make sense for most people who want to buy a home with a conventional loan. You have access to more lenders and lower interest rates than you would with similar non-conforming conventional loans. Conforming loans are also easier to shop for because they have similar standards. A conventional loan might be right for you if you don’t qualify for or want a government-backed loan and your loan meets Fannie Mae and Freddie Mac’s respective criteria.
When A Non-Conforming Loan Works
There are many instances where your only choice will be to get a non-conforming loan. You must opt for a non-conforming VA, USDA or FHA loan if you want to take advantage of a 0% down payment and 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. 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.
A conforming loan is a type of conventional loan that meets Fannie Mae and Freddie Mac’s purchase standards as well as a specific loan amount. Conforming loans all have similar standards, which makes them easier to shop for.
A non-conforming loan doesn’t meet Fannie and Freddie’s purchase standards. Government-backed loans and high-value jumbo loans are two examples of non-conforming loans. Non-conforming loans 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.
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