Mortgage loans are divided into two categories: Conforming Loans and Non-Conforming Loans. Below, we will highlight the features and benefits of each one, how they relate to each other, and the different options available to home buyers.
What is a Non-Conforming Loan?
A non-conforming mortgage loan is one that does not meet the requirements to be purchased by Fannie Mae or Freddie Mac, two government sponsored agencies that invest in mortgage loans.
Any type of government-backed loan is a non-conforming loan; these include VA, FHA, and USDA mortgage loans. Any jumbo loan where the loan amount exceeds the conforming loan limit for the county is also a non conforming loan.
The Benefits of Non-Conforming Loans
- Non-conforming loans have programs available with little to no down payment required. USDA or VA loans have no down payment required, and FHA loan has a 3.5% down payment requirement.
- Non-conforming loans have lower credit score requirements, so they are available for more people.
- Non-conforming loans have higher loan limits, if the home you are wanting to purchase is outside of the conforming loan limits for the county.
- Non-conforming loans are available on different types of properties that might not be available to purchase with a conforming loan.
Non-Conforming vs. Conforming Loans
- All conforming loans are conventional, but not all conventional loans are conforming.
- Any jumbo conventional loan is non conforming.
- Non-conforming loans do not meet the purchasing requirements for Fannie Mae or Freddie Mac.
- Conforming loans have less risk attached to them, so sometimes this can mean less documentation is required by the mortgage lender.
- Conforming loans typically have lower interest rates.
- Non-conforming loans have a less strict credit score requirement.
- Non-conforming loans allow borrowers to have derogatory marks on their credit (such as bankruptcies, etc.), while conforming loans do not always allow these.
A conforming loan is a conventional mortgage loan that is under the loan limit for the specific county, and meets the requirements to be purchased by Fannie Mae or Freddie Mac. A non conforming loan is anything that falls outside of these requirements, including all government-backed and jumbo loans. Different situations might make more sense for someone to take out either type of loan. If you are looking to purchase a home with a conventional loan, conforming might be the route you want to go. But, if you have a lower credit score or want a lower down-payment requirement, then a non conforming loan might be a better fit. Get in touch with a loan officer today, and they can go over both options to determine what is the best fit for you.