If you cannot meet conforming lending guidelines (such as a down payment and a high credit score), you may still be able to take out a non-conforming mortgage from a traditional lender. Taking out a non-conforming mortgage is almost always more expensive than taking out a traditional loan. However, it can be much cheaper than using a hard money lender.
Fannie Mae and Freddie Mac Conforming Loan Standards
Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE) that set the lending standards used by banks. They set terms such as limits on the maximum loan amount, down payment requirements, credit score requirements, and more. When banks make loans that meet these standards, they are called “conforming loans.” Banks are always able to sell conforming loans to other lenders or to Fannie Mae / Freddie Mac. Lenders view these loans as safe because they all meet the same lending standards.
If you cannot meet the conforming lending standards (i.e. your needed loan exceeds the limit or you have a poor credit score), a bank may still be willing to give you a mortgage. Instead of using the standards set by the GSEs, the bank will use its own requirements. The bank will not be able to sell your non-conforming mortgage to Fannie Mae or Freddie Mac. It may also have a more difficult time selling the mortgage to other lenders. Because of the perceived risk of default and the difficulty of selling your loan on the secondary market, the bank will give you a higher interest rate.
Types of Non-Conforming Bank Mortgages
There are non-conforming bank loans for just about any situation. You can find non-conforming mortgages that make allowances for exceeding conventional limits, having a poor credit score, lacking a down payment, the inability to verify income, and other common issues.
Generally, lenders are more willing to make non-conforming loans when the borrower only deviates from conventional lending standards in one or two ways. For example: A lender may be likely to grant a non-conforming loan to a borrower that does not meet credit score requirements but brings a down payment to the table and can prove income / a steady job. A lender is less likely to give a non-conforming mortgage to a borrower that doesn’t meet credit score requirements, has no down payment, and cannot prove an income.
Benefits of Taking out a Non-Conforming Mortgage
If you absolutely cannot take out a traditional loan, applying for a non-conforming mortgage is probably the next best option. You will have the benefit of working with an established bank and can get a much better interest rate than you would with a hard money lender.
Drawbacks of Taking out a Non-Conforming Mortgage
The interest rate on your non-conforming mortgage will be higher than interest rates on conforming mortgages. However, you will still need to qualify for guidelines set by the bank. Depending on the market and your personal situation, not all potential borrowers are able to meet these qualifications.
Non-Conforming Mortgage Alternatives
If you can improve your financial situation in a reasonable time period, applying for a conforming mortgage is your best bet.
Before applying for a non-conforming mortgage, explore your options thoroughly. Both Fannie Mae and Freddie Mac have conforming loan programs designed to help borrowers who may not qualify for their traditional rules. The “jumbo loan,” for example, is available to borrowers who need mortgages exceeding traditional limits. You may also want to look into FHA mortgage programs to find loans designed for borrowers with poor credit, bankruptcy records, or the lack of a large down payment.
If you cannot qualify for a non-conforming option, you may consider borrowing through a hard money lender. Hard money mortgages tend to have extremely high interest; but they have fewer requirements than any other option.
Usage Note: Some people use the term “non-conforming mortgage” to refer only to loans that exceed the maximum loan limit as set by Fannie Mae / Freddie Mac. These larger loans are also called “jumbo loans.” In general, however, “non-conforming mortgage” is an umbrella term that encompasses all mortgages not meeting the Fannie Mae / Freddie Mac guidelines.