A non-conforming mortgage in real estate does not adhere to financing limits set by the Federal Housing Finance Agency (FHFA) Fannie Mae and Freddie Mac won’t purchase these loans because they don’t meet their underwriting guidelines. 

  • Learn what makes a mortgage non-conforming 
  • Learn about requirements and rates 
  • What lenders underwrite non-conforming loans 

If you require a loan that doesn’t meet the guidelines and requirements you will have significantly more paperwork as well as a higher interest rate. 

Difference Between Conforming and Non-Conforming Mortgages 

The difference between conforming and non-conforming mortgage loans is whether the loan conforms to financing limits set by the Federal Housing Finance Agency and the underwriting guidelines set by Fannie Mae and Freddie Mac.1  

Description for a Conforming Loan 

The FHFA sets guidelines for financing standards in order for a loan to be conforming. Further, Fannie Mae and Freddie Mac have guidelines that the loan must meet for them to underwrite.  You may ask, then, what does it conform to; and why is it important? Fannie Mae and Freddie Mac are government-sponsored companies that buy conforming loans. They operate behind the scenes and: 

  • Provide a secondary market for mortgages 
  • Allow lenders to package loans together into investment bundles and sell them 

This secondary market frees up capital for banks so that they can continue to underwrite more loans.  

Description for a Nonconforming Loan 

Nonconforming loans do not meet FHFA limits and/or Fannie Mae and Freddie Mac guidelines. Most of these loans exceed the house price limit, and we call them jumbo loans. These loans will have higher interest rates and more expensive closing costs. Also, most of the time the bank requires that you put down at least 20%. 

Other factors make a loan nonconforming as well. These include: 

  • Credit history issues 
  • Low credit scores 
  • Too much debt (debt-to-income ratio) 
  • The loan-to-value ratio of the deal is too low (this may happen if you put down less than 20%) 

It sounds like a lot of requirements for a loan to be conforming, but in reality, most loans meet the FHFA and Freddie and Fannie standards.  

Non-Conforming Mortgage Example

Jumbo loans are a very common non-conforming loan. Every year the FHFA adjusts the limit according to inflation and market conditions. If you buy an expensive house and its sale price is higher than the limit you can expect: 

  • To pay a higher interest rate 
  • More qualifying conditions 
  • At least a 20% down payment 

In addition, you also need a higher credit score. Therefore, if you buy a luxury home you need excellent credit and substantial savings. That makes sense, but most middle-class home buyers won’t need to worry about going over the FHFA’s limits.  

Non-Conforming Mortgage Requirements 

We discussed the FHFA limits in the example above, but the two government-sponsored entities, Fannie Mae and Freddie Mac also have underwriting requirements. They set guidelines for: 

  • Down payment – Usually 20% or as little as 10% with Private Mortgage Insurance 
  • Credit score – Minimum 680 
  • Debt-to-Income Ratio of less than 40% 

Your bank may have some wiggle room with these. For instance, if you qualify for an FHA loan you only must put down 3%. It may seem confusing, but your mortgage company will help you because it is in their best interest to meet the requirements too. If you can’t meet the requirements, then you should expect a higher interest rate and a lot more paperwork.2  

Non-Conforming Mortgage Rates 

Interest rates for non-conforming loans may vary widely. For conforming loans, Freddie Mac and Fannie Mae set the price for what they will pay for loans, and that helps stabilize the market in terms of interest rates. However, once they aren’t involved then each bank must assess the risk that your loan poses. These assessments may be quite different from one bank to another. You can be sure, though, that you will pay a higher interest rate. 

Non-Conforming Mortgage Lenders 

Most banks will underwrite a non-conforming loan if they believe the risk is not greater than the potential reward. If you know that your loan won’t meet the requirements: 

  • Make sure you have documented your income and other financial interests carefully and thoroughly 
  • Shop around several lenders for the best terms 

While banks will make loans that are advantageous to them you must be careful. Fannie Mae and Freddie Mac help to establish consistent loan terms, but if they won’t buy the loan the market becomes much more complicated and dangerous for home buyers. 

Final Thoughts Non-Conforming Mortgages

It is important to remember that most middle-class home buyers will meet the requirements and guidelines for a conforming loan. If you don’t, you should think carefully about whether this is the optimal time to buy a house.  What condition(s) prevented you from getting a conforming loan? Is there anything you can do to meet the requirements? There are important questions to ask because the terms for a non-conforming loan will be much less appealing.  

It may be as easy as providing more paperwork. It may require you to increase your savings or repair your credit. You must weigh these against the benefits of purchasing a house now. Often, waiting and making your finances are in order is the best way to move forward. 


  1. Nerd Wallet 
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