First, we want you to know it’s not a bad thing. You are not automatically going to pay inflated interest rates or closing fees. It’s just a way to help people that don’t qualify for the standard mortgage to still get the financing they need/want.
What is a Non-Conforming Mortgage?
All that it means when you have a non-conforming mortgage is that your loan won’t be bought or backed by Fannie Mae, Freddie Mac, the FHA, VA, or USDA.
You will get your loan from a standard lender – it may even be a lender that offers conventional loans. You will even go through the same approval process. The difference is that the lender will keep your loan on the books – they won’t sell it. This way they can make their own rules to a point. They don’t have to abide by the Qualified Mortgage Rules or the rules of any investors. They do, however, have to follow the Ability to Repay Rules.
The Ability to Repay Rules just ensures that the lender confirmed that you could afford the loan. It’s a way to make sure no one gets a loan based on stated income or assets. The lender must prove beyond a reasonable doubt that you can afford the loan.
What Does a Non-Conforming Loan Look Like?
So what makes up a non-conforming loan? It could be just about anything that doesn’t meet the typical Fannie Mae/Freddie Mac guidelines. Below are a few of the most common examples:
- Jumbo loans – Loans that exceed the conforming limit of $453,100 become non-conforming loans because of their size and the risk that poses
- Irregular income – If you work for yourself or on commission and your tax returns show a loss, you may need an alternative way to verify your income. Conforming loans don’t offer this option, so you have to turn to a private lender that can accept bank statements or some other form of income verification.
- High debt ratio – If you have a debt ratio that exceeds the allowed amount for a conventional or government loan, you may have to turn to a private lender that has a higher threshold for risk.
- Gaps in your employment – If you have a spotty employment history that conforming lenders don’t want to risk, you may have to turn to a lender that will not penalize you for having gaps in your employment history.
- Any irregular payment options – Conforming loans can only be fully amortized loans with standard terms. You cannot have negative amortization, interest-only payments, or balloon payments. If you need irregular payment options, you’ll have to turn to a private lender.
Luckily, you don’t have to expect anything bad when you choose a non-conforming loan. You can still shop around for the best interest rates and terms. You don’t have to take a loan just because a lender will give you one. There are hundreds of non-conforming options out there – you just have to shop around and compare your options as you would for any other loan.Click to See the Latest Mortgage Rates»