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What are Non-Conforming Loans?

Non-conforming mortgages don't meet Fannie Mae and Freddie Mac's rules. Examples of non-conforming loans are jumbo and government-backed loans, including FHA, VA, and USDA. These loans are still good, reliable mortgage programs that have helped millions of people become homeowners.
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What is a non-conforming loan? Read on to learn more! 

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How do Non-Conforming Loans Work?

Like all mortgage loans, non-conforming loans require that the borrower(s) complete an application to qualify. Your lender will walk you through the application process. You will be asked to provide proof of income and other documents, and a mortgage loan specialist will ask permission to review your credit score.
Each type of non-conforming loan (we’ll look at each type further on in this article) has different requirements that borrowers must meet to qualify.
Getting approved for a non-conforming mortgage is a seamless process, and once you are approved, you’ll make monthly loan payments according to the terms of the loan.

Non-Conforming Loans vs. Conforming: What's the Difference?

  1. Debt-to-income (DTI) Ratio. Conforming loans can go to a maximum DTI of 43%, while non-conforming may go to 50%, allowing people with higher debt and lower income qualify.
  2. Credit Score. Conforming loans require a minimum 620 credit score. Non-conforming loans will allow individuals with lower credit scores to qualify.
  3. Loan Limit. The 2022 conforming loan limit is up to $647,200 in most of the U.S.

Types of Non-Conforming Loans

Examples of non-conforming loans include:

1. Government-Backed Loans

  • FHA Loans. Popular among first-time homebuyers, FHA loans require a minimum 580 FICO score. Borrowers with at least a 580 or higher may be eligible for an FHA loan with only a 3.5% down payment on a home purchase. Borrowers with a FICO score as low as 500 may qualify for an FHA loan if they can make a down payment of 10%.
  • VA Loans. Insured by the U.S. Department of Veterans Affairs, VA loans are available to qualifying U.S. Armed Forces Veterans, Active Duty Service Members, certain Reservists and National Guard members, and certain surviving spouses of deceased Veterans. VA loans often do not require a down payment. There is no minimum credit score requirement. Instead, VA requires a lender to review the entire loan profile. Learn more about VA loans.
  • USDA Loans. This government loan program helps low and very low-income applicants obtain housing in eligible rural areas by providing payment assistance to increase an applicant’s repayment ability. Payment assistance is a type of subsidy that reduces the mortgage payment for a short time. The amount of assistance is determined by the adjusted family income.
2. Jumbo Loans. These loans are used to finance high mortgage amounts, often for luxury homes. A jumbo loan is a non-conforming loan, as it doesn’t conform to the requirements of Fannie Mae, Freddie Mac, and their regulator, the Federal Housing Finance Agency (FHFA).
3. Purchase Money Mortgage. Also know as “seller financing” or “owner financing,” in a purchase money mortgage, the property seller issues the loan. This may be done if the buyer cannot qualify for a mortgage from a traditional lender.
4. Holding Mortgage. This is where a property’s seller acts as the lender, so that the buyer makes payments to the seller (with agreed-upon interest) until the purchase is paid in full. In this case the seller “holds the mortgage.”
5. Hard Money Loan. This type of loan is secured by the borrower’s real estate as collateral. For example, an investor may get a hard money loan to buy a property to fix and resell in a short period of time. The borrower may also not have the required credit score or income to borrow from a credit union or bank. Hard money loans have high interest rates and are only worth it if paid back quickly.
6. Interest-Only Mortgage. This is a mortgage in which the borrower’s monthly payments are paying only the interest portion of the loan, and not paying down the principal or balance. A common type of Interest-Only Mortgage is the Adjustable Rate Mortgage (ARM), which comes with an introductory Interest-only rate and then adjusts such that payment includes interest and principal.

Advantages of Non-Conforming Loans

Non-conforming loans have numerous advantages and allow first-time homebuyers, individuals with low income, as well as investors, the opportunity to get the home they want.
  1. Flexible terms. Because these loans don’t need to conform to specific guidelines, the terms tend to be more flexible.
  2. More property purchasing options. Again, due to non-conformity, there are less limitations or no limitation on they type of property that can be purchased, such as a condo-co-op, and multi-unit properties, to name a few.
  3. Credit leniency. While conforming loans require a minimum 620 credit score, non-conforming loans will allow individuals with bad credit or lower credit scores to qualify.
  4. Looser income verification. All lenders look at a borrower’s debt-to-income ratio (DTI) to determine their ability to repay the loan. Conforming loans can go to a maximum DTI of 43%, while non-conforming may go to 50%, allowing people with higher debt and lower income qualify.
  5. Smaller down payment. There are mortgage programs that allow no money down or low (3.5%) down.

Disadvantages of Non-Conforming Loans

  1. Fewer lenders to choose from. Because of the higher risk of non-conforming loans, many lenders don’t offer these mortgages.
  2. Higher interest rates. Non-conforming mortgage rates tend to be higher to cover lender risk if the borrower defaults on payments.
  3. May be hard to qualify. Lenders may be more selective about issuing loans.
  4. Higher chance of foreclosure. Low-income borrowers may be at higher risk for foreclosure due to a higher interest rate or an adjustable rate. These loans may end up costing more than anticipated.

Is a Non-Conforming Loan Right for Me?

Deciding which mortgage is right for you can be made based on your income and how much you can afford in monthly mortgage payments, the type of property, the price of the home, and the loan criteria. We recommend speaking to a CU SoCal mortgage specialist about which loan option works best for your unique situation.
Here are some tips for deciding how much house you can afford.

Where to Get a Non-Conforming Loan

Common non-conforming loans, such as jumbos, FHA, VA and USDA, and ARMs are available from credit unions, banks, online lenders, and other lenders. Credit unions, including Credit Union of Southern California, are often the preferred choice for several reasons, including low interest rates, low or no fees, and lower closing costs. Learn how to choose the right mortgage lender.

How to Apply for a Non-Conforming Loan

Getting a mortgage can be easy, as long as you’re prepared. Here are some of the basic steps to getting a mortgage.
  1. Gather Your Documents. This includes paystubs/proof of income, W-2s or 1099s, proof of debt, and proof of assets.
  2. Check Your Credit Score. Knowing your credit score before you apply for a mortgage can save you time. If you find your credit score is very low (below 580), you may need to build your credit score in order to qualify for a mortgage. Check it for free here.
  3. Find The House You Want. Working with an experienced real estate agent can help you find the right home quicker.
  4. Apply for the Mortgage. Once your offer is accepted, you will complete the application process that includes getting an appraisal on the home, and other steps that your mortgage professional and real estate agent can guide you through.
  5. Closing. Once your application is approved, the loan is clear to close. These days, many closings are done virtually with funds wired to the seller. A Title Company, chose by the seller, will typically manage the closing.

Why Savvy Consumers Choose CU SoCal

For over 60 years CU SoCal has been providing financial services, including mortgages, Home Equity Loans, HELOCs, car loans, personal loans, credit cards, and other banking products, to those who live, work, worship, or attend school in Orange County, Los Angeles County, Riverside County, and San Bernardino County.

Please give us a call today at 866.287.6225 today to schedule a no-obligation loan consultation with a CU SoCal Member Services specialist.

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