The offers on this page are from advertisers who pay us. That may influence which products we write about, but it does not affect what we write about them. Here's an explanation of how we make money and our Advertiser Disclosure.

What is a non-conforming loan, and how does it work?

Yahoo Personal Finance· Getty Images
Updated 6 min read

Many home buyers use a conforming loan, or what you might think of as a “regular mortgage,” when buying a home. These loans are considered lower risk to mortgage lenders because the maximum amount you can borrow is capped by the Federal Housing Finance Agency (FHFA) and all borrowers must meet specific eligibility requirements.

But if you want to borrow more money than you can get with a conforming loan or don’t meet all the borrower requirements, another kind of mortgage may be right for you: a non-conforming loan. The term “non-conforming loan” covers various types of mortgage loans, so it’s essential to understand what a non-conforming loan is and how it works. Here’s what you need to know.

Dig deeper: What are the best home loans for first-time home buyers?

In this article:

An oversimplified way of defining a non-conforming loan is to say it is not a conforming loan. To better grasp non-conforming loans, it helps to understand what exactly a conforming loan is. Mortgage loans must meet several specific rules to be considered a conforming loan. These include:

  • Loan limit: The Federal Housing Finance Agency (FHFA) sets borrowing limits for conforming loans. In 2024, the conforming loan limit is $766,550 in most parts of the United States, but it may be set as high as $1,149,825 in high-cost areas. You cannot get a conforming loan if you borrow more than these set loan amounts.

  • Minimum credit score: Generally, borrowers must have a FICO credit score of at least 620 to qualify for a conforming loan.

  • Maximum debt-to-income ratio (DTI): Borrowers must have a DTI of no greater than 50% to qualify for a conforming loan. Some mortgage lenders require lower DTIs.

  • Maximum loan-to-value ratio (LTV): Conforming loans must have an LTV ratio of 97% or lower, meaning borrowers must make a minimum 3% down payment to qualify for a conforming loan.

Any mortgage loan not meeting these criteria is considered a non-conforming loan.

Learn more: How much down payment do you need for a house?

While mortgage lenders initiate mortgage loans, many lenders later sell those loans. This allows the lenders to raise money so they can make more loans.

Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) and are the largest buyers of mortgages on the secondary market. These GSEs will only purchase conforming loans. This makes certain non-conforming loans somewhat riskier for lenders since Fannie Mae and Freddie Mac will not buy the loan, and especially with less common types of mortgage loans, there is no guarantee that another buyer will do so.

Dig deeper: HomeReady and Home Possible loans — How to get a 3% down mortgage

These are the most common non-conforming loan types that the average homebuyer may encounter:

Various types of mortgage loans insured by the federal government have more lenient borrowing requirements than conventional loans. The most common government-backed loans include:

  • FHA loans: These require a minimum credit score of 580 with a 3.5% down payment or a minimum score of 500 with a down payment of 10% or more. FHA loans are insured by the Federal Housing Administration (FHA).

  • VA loans: These mortgages are available to qualifying military-affiliated borrowers and do not have minimum down payment requirements. They are insured by the U.S. Department of Veterans Affairs (VA).

  • USDA loans: These loans are for lower-income buyers in rural areas, and they’re insured by the U.S. Department of Agriculture (USDA).

A jumbo loan is a mortgage for an amount exceeding the FHFA limit for conforming loans. Often, jumbo loans are used for luxury homes.

Like conforming loans, jumbo loans are considered a type of conventional loan. They are not backed by the federal government, like FHA, VA, and USDA loans.

The following types of non-conforming loans are less common than government-backed and jumbo mortgages, but they’re still potential options for borrowers with specific financing needs:

  • Interest-only loans: This mortgage allows you to make interest-only monthly payments for a set period. After the interest-only term, you’ll make payments toward both the mortgage principal and interest.

  • Bridge loans: These short-term loans offer financing during a transitional period, such as when a home buyer needs to finance a new house before selling their previous one.

  • Purchase-money loan: Also known as seller financing, this kind of mortgage is issued to the borrower by the home seller.

These less common non-conforming loans tend to have higher mortgage rates than conforming loans.

There are several reasons why a non-conforming loan might be right for you. First of all, non-conforming mortgage loans (particularly FHA, VA, and USDA mortgages) can offer more flexible eligibility requirements because they do not have to adhere to conforming loan guidelines. They can also give you more options when shopping for a home since you are not limited to mortgages for the FHFA loan limit of $766,550 or less.

Read more: How much house can I afford?

Borrowers with less-than-stellar credit scores, lower incomes, more debt, or less money set aside for a down payment may prefer non-conforming loans since they are much more lenient about each of these requirements. Jumbo loans are the exception — since you’re borrowing more money, mortgage lenders typically have stricter standards. Depending on the type of loan and mortgage lender, certain uncommon loans may also have more stringent requirements.

However, there are also definite drawbacks to non-conforming loans. For example, fewer lenders offer non-conforming loans since they pose a higher risk to the bank or mortgage lender. Some non-conforming loans (like FHA mortgages) are common, while others (like USDA loans) can be harder to find. The higher risk of interest-only and bridge loans also means lenders charge higher rates to protect themselves, making these loans more expensive than conforming loans.

Non-conforming loans can be the right choice for many home buyers, but it’s essential to understand their potential costs before making your decision.

Learn more: Getting a mortgage with good (but not great) credit

A non-conforming loan is a mortgage that does not meet the lending guidelines set out by Fannie Mae and Freddie Mac. The most common types of non-conforming loans are government-backed mortgage loans — like FHA, VA, and USDA loans — and jumbo loans, which are for amounts exceeding the FHFA borrowing limits.

It depends on the type of non-conforming loan. Jumbo loan rates are usually similar to conforming loan rates. FHA, VA, and USDA loans usually have lower interest rates because they are insured by federal departments, such as the U.S. Department of Veterans Affairs. Less common non-conforming loans, such as bridge loans, often have higher interest rates.

Conforming loans are a type of conventional loan — even though all conforming loans are conventional, not all conventional loans are conforming. For example, jumbo loans are non-conforming conventional loans since they are not insured by the federal government (meaning they are conventional mortgages). Still, they exceed the FHFA lending limits (meaning they are non-conforming).

This article was edited by Laura Grace Tarpley