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.
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.
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 to 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.
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 lender today, and they can go over both options to determine what is the best fit for you.