Understanding Non-Conforming Loan

Non-Conforming Loan is a mortgage loan that cannot be purchased or guaranteed by Fannie Mae or Freddie Mac because the principal loan amount is above the conforming loan limit set by Federal Housing Finance Agency. Since these loans have lower liquidity and carry higher interest rates and origination points.

Jumbo Loans

Jumbo Loans are a type of non-conforming loans which exceed the conforming loan limits set by FHFA. In other words, Jumbo Loans are loans that do not meet the guidelines for Conforming Loans only because of the large loan size. Some institutions classify loans above $1 million as Super Jumbo Loans. The Conforming Loan Limit page contains the current loan limits beyond which the loans would be Jumbo Loans.

Benefits to the Borrower

1. Access to Large Loan Amounts: Non-conforming loans allow the borrower to obtain loans for large amounts.
2. Customized Loans: The borrower may be able to borrow for unique circumstances, loan amounts, or properties. For example, a lender may create a non-conforming loan for self-employed borrowers that are unable to verify incomes via traditional means.

Limitations for the Borrower

1. Higher Interest Rate: Non-Conforming loans usually have higher interest rates than compared to Conforming Loans. This is due to the higher risks and lower liquidity inherent in the non-conforming loans.
2. Higher Origination Fees/Points: The cost of obtaining a Non-Conforming loan is generally higher than the conforming loans. The higher cost is due to higher origination fee and additional fees. The number of lenders offering a particular type of Non-Conforming loan may be less, and this reduced competition may enable the lender to charge higher origination fees. The lender may also require higher fees to process the extra documentation that typically needs to be reviewed for a Non-Conforming loan. There may be additional third party or lender fees associated with the additional documentation that a lender may require. For example, the cost of second appraisal, that a lender may require for loans above $1 million.
3. Higher Documentary Requirements: The underwriting of Non-Conforming loans may be more detailed which may require the borrower to produce more documentation. This increases the time and cost needed to close a loan.
4. Time Consuming Approvals: As a risk mitigation strategy, the lender usually requires the large or complex loans to be approved by additional underwriters or undergo a committee approval. This would increase the time needed to close a loan.

Risks to the Lender

1. Less Liquidity: Fannie Mae and Freddie Mac would not buy these loans which reduces the demand and liquidity of these loans. The lender may need to depend on private players in the securitization market.

Updated: Jul 11, 2011