Non-Conforming

Non-Conforming Loans

What Is a Non-Conforming Mortgage?

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.

Jumbo Loans

The most common nonconforming mortgage is what’s often called a jumbo mortgage—loans written for an amount more substantial than the Fannie Mae and Freddie Mac limits. 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 Factors

Mortgages don’t have to be jumbo to be nonconforming. A low down payment can trigger nonconforming status, too. The threshold varies but could be 10-percent on a conventional mortgage or as little as 3-percent on a Federal Housing Administration (FHA) loan.

Also, a factor is the buyer’s debt-to-income ratio (DTI), which typically must not exceed 43% to qualify as a conforming loan. A credit score of or above 660 is usually required as well.

The type of property can also determine if a mortgage is nonconforming. For example, buyers of condos often get tripped up when they learn their dream vacation unit is nonconforming because the complex is considered non-warrantable. That includes condo associations where a single entity, such as the developer, owns more than 10-percent of the units. Other pitfalls include if a majority of the units are not owner-occupied, if more than 25-percent of the square footage is commercial, or if the homeowners association (HOA) is in litigation.

Community Development Financial Institution (CDFI)

The Community Development Financial Institutions Fund (CDFI Fund) plays an important role in generating economic growth and opportunity in some of our nation's most distressed communities. By offering tailored resources and innovative programs that invest federal dollars alongside private sector capital, the CDFI Fund serves mission-driven financial institutions that take a market-based approach to supporting economically disadvantaged communities. These mission-driven organizations are encouraged to apply for CDFI Certification and participate in CDFI Fund programs that inject new sources of capital into neighborhoods that lack access to financing. These entities sprung up as a direct result of the Community Reinvestment Act of 1977, which was drafted because of banking and economic development inequalities throughout communities in the U.S.

In the search for affordable housing, people from low-income communities may find they don’t meet the stringent requirements needed to qualify for a home mortgage from a traditional financial institution. In addition, they are frequently priced out of quality rental housing.

○ Income documentation not required

○ Income not stated

○ DTI not calculated

○ Credit underwritten based on LTV, FICO, and liquidity

○ Primary residence and second homes

○ LTV up to 80% purchase/rate-and-term

○ LTV up to 70% cash-out

○ FICO beginning at 640

○ Debt consolidation = rate/term

Ideal for:

○ Self-Employed/Small Business Owner

○ Volatile or Irregular Income

○ Retired

○ Seasonal & Gig Workers

○ Real Estate Investors

○ Owners & Employees of Cash Businesses

○ Newly Self-Employed

○ Transitioning from Recent Health, Family, or Other Life Events

○ Looking to Tap Trapped Home Equity

○ Recent Immigration

○ Disqualified Income