Non Conforming Loan
A non-conforming loan is a mortgage that doesn't meet the guidelines set by government-sponsored enterprises like Fannie Mae and Freddie Mac, often due to loan amount, borrower credit profile, or property characteristics. These loans cannot be purchased by these agencies and are typically held by the originating lender or sold to private investors.
Example
“Their $850,000 home purchase required a non-conforming loan because it exceeded the conforming loan limit of $766,550 in their county.”
Memory Tip
Non-conforming loans don't 'conform' to government size limits - think of a big loan that won't fit in the government's standard box.
Why It Matters
Non-conforming loans provide financing options for borrowers who don't fit standard lending criteria, though they often come with higher interest rates and stricter terms due to increased lender risk.
Common Misconception
People often think non-conforming loans are inherently risky or subprime, but many are simply jumbo loans that exceed conforming loan limits for high-value properties.
In Practice
A borrower seeking a $900,000 mortgage in an area where the conforming loan limit is $766,550 would need a non-conforming jumbo loan. The lender might offer this loan at 0.25% higher than conforming rates and require a larger down payment.
Etymology
The term arose in the 1970s when government-sponsored enterprises established loan 'conforming' limits, making anything above these amounts 'non-conforming' to their standards.
Common Misspellings
Compare the best financial products for you
More in financing
Other financing terms you should know
Need financial definitions?
Clear definitions for 2,500+ finance, insurance, and investing terms.