What are Non-Conforming Loans?

What does non-conforming mean?

2 Answers

Let's start with what conforming means. Conforming loans are loans that conform to the underwriting guidlines set forth by the Federal Housing Finance Agency for loans the Goventment Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can purchase. Often the term is used to refer specifically to the maximum mortgage amount that conforms to the GSE loan limit. For example, at the current time the loan limit of a mortgage on a single family home in most areas of the US that can be put into a GSE pool is $417,000. So mortgages with a loan amount of $417,000 or less are often called "conforming" loans.

Loans that are above the loan limits for GSE loans are "non-conforming" or jumbo loans. It could be said that any loan that does not conform to GSE guidelines are "non-conforming," but typically the term is used to refer to the loan limit.

Non-conforming is a real estate term that applies to loans that do not fit agency or conforming loan limits or guidelines. Currently their are three different classifications for residential home loans, conforming, jumbo conforming, and non-conforming. Non-conforming is sometimes referred to as jumbo or super-jumbo because they represent extraordinary loan amounts for the area in question. These loan amounts will very depending on region, and should be discussed with your loan officer.

When looking into a non-conforming program you are not shopping rates offered through the traditional secondary market channels and therefore the terms can be quite different than what you hear represented through various radio, television, and internet avertisements one may encounter. This is due to most non-conforming lenders inability to sell into a secondary market. Ultimately, this makes most nonconforming lenders portfolio. Portfolio meaning they hold onto, and service the mortgage note themselves.

If you fall into the non-conforming market for whatever reason, you will want to speak with a broker that has an extensive lender approval list; in addition a local credit union may offer alternative solutions and should not be dismissed.