A non-conforming mortgage does not meet the guidelines of government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac; therefore, it cannot be sold to them. These organizations purchase conforming loans from lenders, offering security in case of default on the part of the borrowers.
Characteristics of Non-Conforming Mortgages
Non-conforming mortgages do not meet GSE guidelines and, as a result, are harder to sell. Therefore, these mortgages often have a higher interest rate because of the added risk.
GSE requirements are updated annually and generally include:
- Annual loan value caps: conforming loans must be under a specific dollar value. Non-conforming loans are those that exceed the maximum limit. The limit changes annually to reflect current real estate market prices and varies depending on the market climate in specific locations.
- Minimum down payment requirements: loans require anywhere from a 3 – 20% down payment. To be conforming, buyers must pay the full down payment amount.
- Credit requirements: Conforming loans have minimum requirements for the borrower’s credit score, debt-to-income ratio, credit history, and other related criteria. If these are not met, the borrower may only be eligible for a non-conforming loan.
Because non-conforming mortgages are not as secure as conforming mortgages, they are typically considered higher risk. For this reason, non-conforming loans tend to be offered at higher interest rates and less favorable terms. Lenders may also place stricter credit requirements on the borrower, such as a higher credit score or a larger down payment.
Non-conforming loans may be offered as either variable-rate mortgages or fixed-rate for any time period. Lenders typically prefer to give out 30-year fixed-rate loans when allowing non-conforming mortgages.
Non-Conforming Mortgage Types
Home loans may be considered non-conforming because of the borrower or the property being purchased. There are a few common types of non-conforming mortgages that borrowers may encounter.
Jumbo Home Loans
The majority of non-conforming mortgages are jumbo loans. These are mortgages where the dollar value of the loan exceeds the annual GSE cap. If the borrower wishes to take out a loan for an amount that exceeds the cap, it will automatically be considered a non-conforming jumbo loan.
Many times, jumbo loans are used to purchase expensive properties, investment properties, or commercial properties. These loans often meet all the other requirements for conforming loans, such as high credit score requirements and down payment size, but they cannot be conforming because of the value of the loan.
Although jumbo loans are not eligible to be secured by Fannie Mae and Freddie Mac, they are often secured by third-party agencies. However, the borrower must have a consistently high income, a good credit history, and show the ability to maintain the loan payments.
Low Down Payments
Mortgage loans that are offered for a highly reduced down payment, or no down payment, might be considered non-conforming. If the lender does not require a down payment or requires a minimum down payment that is lower than the conforming loan limit in the area, the mortgage is likely to be non-conforming.
Low Credit Score
Prospective homebuyers who do not meet the credit score requirements for a conforming loan may still be eligible for a non-conforming mortgage. In cases where the borrower’s credit is low, the loan is considered too high risk to be conforming.
High DTI Ratio
Borrowers with a high debt-to-income (DTI) ratio are also unlikely to receive a conforming loan. The risk of a higher DTI ratio is that the borrower will not be able to pay the monthly mortgage payment for the life of the loan. Because of the increased risk surrounding the borrower, the loan may be non-conforming.
Borrowers who have gone through personal bankruptcy in the last 5 – 7 years may be ineligible for a conforming loan. The type of bankruptcy, time since the declaring bankruptcy, and the person’s financial recovery all play a part in determining whether they are eligible for a conforming loan or if they are only eligible for a non-conforming loan.
Non-Conforming Loan Properties
Even if the borrower meets all requirements, the property itself may be ineligible for a conforming loan. Some specific characteristics of properties can force the buyer to take a non-conforming loan to make the purchase. Common reasons include:
- Non-warrantable condominiums: a non-warrantable condo is any condo that is ineligible for a conforming loan. This can be a result of the property’s condition, state of the building in which the condo is located, condo ownership structure, or a variety of other reasons.
- Mixed use properties: a borrower looking to purchase a property or part of a property that is for mixed use, such as residential and commercial, may not be able to get a conforming loan.
- Properties with HOA litigation/disputes: If the property in question is part of a complex where multiple other owners are in active litigation or a legal dispute with the homeowners association (HOA), this may disqualify the property for a conforming home loan.
There are other reasons why a property may be considered ineligible for a conforming loan. Borrowers should vet the property itself, not only their own credit history and ability to pay the monthly mortgage.
Asset-based mortgages are almost always considered to be non-conforming loans. These are loans that lean heavily on the characteristics of the property being purchased rather than the individual purchasing the property. In many cases, asset-based mortgages are used for commercial reasons.
Both individuals and LLCs are eligible to take out non-conforming loans for business purchases. Because they can also be eligible for conforming loans under the right circumstances, borrowers are not usually encouraged to take out non-conforming mortgages. Because of the potential for higher interest rates and less flexible repayment terms, it may be difficult to recoup losses from purchasing a commercial property with a non-conforming loan.
Non-Conforming Mortgages Vs. FHA Loans
FHA loans are not considered either conforming or non-conforming loans. To be conforming or non-conforming, a loan must first be considered conventional. FHA loans are not conventional loans and are therefore classified differently. Because they are insured by the Federal Housing Administration (FHA), they are not eligible to be secured by Freddie Mac or Fannie Mae.
Marimark Mortgage is based in Tampa, Florida, and serves the mortgage needs of homebuyers, homeowners, and investors in Florida, Virginia, and Pennsylvania.
We specialize in conventional home mortgages, FHA, VA, and USDA mortgage options, refinance loans, and reverse mortgages. We’ve worked extensively with cash-out refinancing and help clients to lower their monthly mortgage payments.