Ask the expert: What is a non-conforming loan?

A non-conforming loan is different than the conventional loan standards.

So, first, let’s talk about conforming loans. A conforming loan is a regular, conventional mortgage, not a loan backed by a government agency. Every year, the Federal Housing Finance Agency sets ‘conforming loan limits.’ These limits establish the top amount you can borrow for a single-unit home.

The limits are designed to prevent over-borrowing and foreclosures. This protects both the borrower and the lender. Lenders are able to insure conforming loans and sell the loans. It’s important for lenders to be able to sell loans they make because it gives them more money to continue lending. Mortgage loans are typically sold to government-sponsored enterprises, Fannie Mae and Freddie Mac.

In the continental U.S., the conforming loan limit for 2022 is $647,200. In some parts of the country, the limit is higher. In Alaska, Hawaii, Guam, and the U.S. Virgin Islands, the limit is $970,800.

You can still borrow more, but since these loans don’t conform to lending limits, they are considered jumbo loans and have different requirements.

Non-conforming loan requirements are different than those for conforming loans. For example, while most lenders require a 620-680 credit score for a conforming loan, they likely expect a credit score of at least 700-740 for a non-conforming loan. The best interest rates will likely require a higher credit score.

The down payment requirement could also be higher. The lender might well expect a downpayment of 20 percent or more, compared to 3 percent to 10 percent on some conventional mortgages.

They might also have different requirements for borrowers’ debt compared to income (the DTI ratio). For a conforming loan, a good DTI is from 36 percent or less, but some lenders accept 43 percent. Sometimes a non-conforming loan will be better for someone who has higher debt compared to income.