What Is a Non‑Conforming Mortgage?
A non‑conforming mortgage is any home loan that does not meet the purchase and underwriting guidelines of the government‑sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, so those GSEs cannot buy it. Because Fannie and Freddie are the largest buyers of mortgages on the secondary market, loans that aren’t “conforming” tend to be less liquid for lenders and therefore carry higher rates, additional fees, or tightened underwriting.
Key Takeaways
– “Conforming” loans meet Fannie Mae/Freddie Mac rules (loan size, borrower credit, debt ratios, property eligibility); non‑conforming loans do not.
– The most common non‑conforming loan is the jumbo mortgage (loan amount above the county conforming limit). In 2025 the baseline limit is $806,500 in most U.S. counties, with higher limits in high‑cost counties (up to $1,209,750 in some areas).[FHFA]
– Other reasons a loan can be non‑conforming: low down payment, high debt‑to‑income (DTI), low or thin credit history, nonstandard property type (e.g., non‑warrantable condos), or alternative income documentation (non‑QM loans).
– Non‑conforming loans can be useful for borrowers who need more flexibility or a larger loan, but they typically cost more and can be harder to obtain.
Understanding Non‑Conforming Mortgages
Why lenders care: Banks originate mortgages and usually sell them into the secondary market to free capital for new loans. Fannie Mae and Freddie Mac buy mortgages that meet their standards (conforming). Loans that don’t meet those standards either remain on a lender’s portfolio or must be sold to investors that specialize in non‑conforming paper. Because those buyers pay less (or are fewer), lenders charge higher rates and/or fees to cover the additional risk and reduced liquidity.[Investopedia]
Key variables that determine conforming status
– Loan amount vs. county conforming limit: If loan amount > applicable conforming limit → jumbo (non‑conforming). Use FHFA for county limits.[FHFA]
– Down payment / loan‑to‑value (LTV): low down payments can make a loan non‑conforming under some programs.
– Credit score: Many conforming loans require a minimum score (commonly around 660+ for some conventional products).
– Debt‑to‑income (DTI): Conforming underwriting often looks for DTI ≤ ~43% (varies by program).
– Property eligibility: Non‑warrantable condos, mixed‑use properties, some investment properties, and unusual property types can be non‑conforming.
– Documentation and loan program: Loans using nonstandard income verification or alternative borrower profiles are often called non‑QM (non‑qualified mortgage) and are non‑conforming.
Types of Non‑Conforming Mortgages
– Jumbo loans: Larger than the county conforming limit; the most common non‑conforming type.
– Non‑QM loans: Borrowers who do not meet Qualified Mortgage (QM) rules (self‑employed borrowers with limited documentation, irregular income, high DTI, etc.). These loans are underwritten and structured differently and are sold to different investors. [CFPB]
– Portfolio loans: Loans that a bank keeps on its books rather than selling. They can be tailored to niche borrower needs (e.g., one investor with unique credit circumstances).
– Government‑program exceptions: Some FHA/VA loans have their own rules and limits; if structured outside those programs they can be non‑conforming for conventional buyers.
– Non‑warrantable condo loans: If a condo association fails specific owner‑occupancy, investor‑occupancy, or corporate‑ownership tests, units may be ineligible for standard conforming financing.
Important Details and How They Affect You
– Rates and fees: Expect higher interest rates and additional upfront/ongoing fees for non‑conforming loans because lenders cannot offload them to Fannie or Freddie as easily. Fannie Mae also applies Loan‑Level Price Adjustments (LLPAs) that vary by credit score, LTV, and other factors; those adjustments changed in May 2023.[Fannie Mae]
– Liquidity and portability: Non‑conforming loans may be less standardized, which can make future refinancing or selling the loan more complex.
– Underwriting variability: Because non‑conforming loans are underwritten to investor or portfolio standards rather than GSE rules, qualification criteria can vary widely between lenders. That can be a benefit (more flexibility) or a hassle (harder to compare offers).
Who Might Non‑Conforming Loans Be Best For?
– Buyers needing more than the conforming limit (jumbos) in high‑cost housing markets.
– Borrowers with thin or alternative credit histories (self‑employed, gig economy workers) who can document income in alternative ways.
– Buyers of non‑standard properties (certain condos, mixed‑use, unique homes).
– Borrowers seeking a product that lenders will hold on their portfolio for customized terms.
What Are the Disadvantages of a Non‑Conforming Loan?
– Higher interest rates and likely higher closing costs.
– Fewer lenders offer certain non‑conforming products, so shopping may be harder.
– Less consistency in underwriting requirements — you may be approved at one lender and declined at another for similar facts.
– If you plan to sell or refinance, fewer buyers may be available for specialized or non‑standard loans.
Can You Refinance a Non‑Conforming Loan?
Yes. You can refinance from one non‑conforming loan to another non‑conforming loan, or (if you later meet conforming guidelines) refinance into a conforming loan. Practical triggers to refinance:
– Market interest rates decline below your current rate.
– Your credit score or DTI improves or you accumulate more home equity to meet conforming LTV limits.
– The property or condo association becomes “warrantable” or you buy down the loan size under county conforming limits.
Practical, Step‑by‑Step Guidance
If you’re considering a non‑conforming loan
1. Confirm whether you really need a non‑conforming product.
– Check the FHFA county conforming loan limit for your property to determine if the amount you need is jumbo.[FHFA]
– Calculate your DTI: (monthly debt payments ÷ gross monthly income) × 100. If DTI is above ~43% you may be non‑conforming for many conventional products.
2. Gather documentation: full credit reports, bank statements, tax returns (2+ years if self‑employed), profit‑and‑loss statements, evidence of reserves. Non‑QM products may accept different documentation, so know what lenders require.
3. Shop lenders strategically: contact portfolio lenders, credit unions, private banks, mortgage brokers, and non‑QM specialists. Because underwriting varies, comparing multiple lenders often yields better terms.
4. Ask about total cost: request a Loan Estimate and compare APRs, LLPAs (if applicable), origination fees, and any prepayment penalties.
5. Negotiate or consider tradeoffs: larger down payment or paying points can lower the rate; improving credit or reducing debt prior to closing can materially lower your cost.
6. Verify condo/property eligibility early: if buying a condo, ask whether the HOA is “warrantable” for conventional underwriting. If it is not, explore lenders that handle non‑warrantable condos.
7. Plan an exit strategy: know under what conditions you could refinance into a conforming loan (improved credit, more equity, market changes) and the timeline to reach that.
If you already have a non‑conforming loan and want to refinance
1. Monitor rates and your credit profile. Improvements in either can qualify you for better offers.
2. Build equity: make extra principal payments or wait for home price appreciation if it reduces your LTV.
3. Shop multiple lenders — different investors have different appetite for buying non‑conforming loans or buying a loan back into a conforming format.
4. Prepare documentation ahead of time to speed underwriting.
5. Consider timing: refinancing costs vs. expected time to recoup those costs should guide your decision (break‑even analysis).
Alternatives to Non‑Conforming Financing
– Increase down payment to fall under conforming limits or LTV thresholds.
– Consider government programs (FHA, VA) if eligible — though they have their own guidelines and limits.
– Partner with a co‑borrower who adds qualifying income or credit.
– Delay purchase and save to reduce loan size or improve credit/reserves.
The Bottom Line
Non‑conforming mortgages are not inherently bad; they are simply loans that fall outside Fannie Mae and Freddie Mac standards. They provide important options—especially for buyers who need larger loans, have nonstandard income, or are purchasing unique properties—but typically at a higher cost and with more lender variability. Shop around, document thoroughly, and consider steps (bigger down payment, credit improvement, shopping specialty lenders) to reduce the cost and improve your refinancing options later.
Sources and Further Reading
– Investopedia. “Non‑Conforming Mortgage.” (source article provided)
– Federal Housing Finance Agency (FHFA). “FHFA Announces Conforming Loan Limit Values for 2025.” https://www.fhfa.gov
– Fannie Mae. “Loan‑Level Price Adjustment Matrix.” https://www.fanniemae.com
– Consumer Financial Protection Bureau (CFPB). “Qualified Mortgage Definition under the Truth in Lending Act (Regulation Z): General QM Loan Definition.” https://www.consumerfinance.gov
If you’d like, I can:
– Check whether a specific loan amount would be jumbo in your county (tell me the county and loan amount), or
– Provide a checklist you can give lenders to compare non‑conforming offers side‑by‑side.