How To Know If You’re a Candidate for a Non-Conforming Loan Roger Odoardi As a first time homebuyer with all of your ducks in a row, it’s not far fetched to assume that you’re good-to-go with getting a conventional mortgage loan that conforms to all of today’s lending standards and guidelines. Think again. You could actually be a candidate for a non-conforming loan and you don’t even realize it. Many borrowers learn too late the differences between a conforming and non-conforming loan, and as a result are shocked to learn that they qualify for the latter. If you’re a prospective homebuyers who is curious about whether they would qualify for a conforming or non-conforming loan, the following guide should help shed some light on this sometimes confusing and complicated mortgage term. Understanding Your Options As a homebuyer in today’s real estate market you essentially have two options when it comes to borrowing money to purchase a house. You can either seek out a non-conventional loan (aka a loan insured and guaranteed through a government sponsored program like the FHA, USDA or VA) or apply for conventional loan (a conforming or non-conforming mortgage) through a lender. The part that gets tricky for most borrowers looking for a conventional loan is figuring out whether they are eligible for a conforming or non-conforming loan. This conundrum can get seriously confusing. A good indicator of which type of mortgage loan you’ll qualify for is the actual size of the loan you need to purchase the house you want. But there are many more reasons as well. Let’s first talk about the difference between the two types of conventional loans. Conforming vs. Non-Conforming Conforming —A conforming mortgage means it meets the loan limits and other standards that qualify them to be purchased by Fannie Mae or Freddie Mac. Loan limits are considered to be certain dollar amounts that a loan must be lower than. Loan limits are however based on area and how many houses are on a particular piece of property. The current maximum loan limit in most U.S. counties is $417,000. If the size of your loan exceeds the $417,000 then you will most likely require a non-conforming loan. Non-conforming —Non-conforming loans are mortgages that do not meet the loan limits discussed above, as well as other standards related to your credit-worthiness, financial standing, documentation status etc. Non-conforming loans cannot be purchased by Fannie Mae or Freddie Mac. The #1 reason for needing a non-conforming loan There are many reasons why you may qualify for a non-conforming loan—the most notable of which involves the following: Your loan amount is higher than the conforming loan limit This is the most common reason for needing a non-conforming loan. If you’re a borrower who needs a loan that is higher than the conforming loan limit then you are in need of a non-conforming mortgage known as a jumbo loan. Be aware that there are instances in which you could qualify for a conforming loan above the traditional loan limit. This is called a super conforming loan and is only eligible in certain counties throughout the United States. Download our free eBook here to learn the 10 must ask questions to when buying a home. Other reasons for needing a non-conforming loan Certain borrowers are unable to meet the lending guidelines of conforming loans, even despite the fact that the size of the loan they are in need of is below the applicable loan limit. The following are some other common reasons you may not qualify for a conforming loan, and as a result require a non-conforming loan: Non-warrantable condos A Non-warrantable condo is not eligible to be sold to Fannie Mae or Freddie Mac. The reasons are many, however the most common involves high commercial or investor concentration. Borrowers as a result may have a tough time securing a conforming loan, and must seek a non-conforming option. Not enough of a down payment A borrower with a down payment of less than 20% of the home’s value will likely need a non-conforming loan. It’s not rare for a borrower to not have the customary 20%, so be sure to check out your down payment options. Also, there are some low down payment programs through Fannie Mae that could still enable you to get a conforming loan with less than 20% down. Issues with documentation A borrower who lacks complete documentation of employment history, income and assets will have a hard time getting a conforming loan. If you need assistance on how to document all your assets, check out these helpful tips on what to know. Believe it or not, non-conforming loans are very common in the mortgage industry. They have to be. Without them, people looking to borrow outside of conforming loan limits would never be able to get mortgages in the first place. If you’re in the market for a mortgage and your financial history has a few bumps and bruises, then you’ll likely end up being one of the numerous borrowers who requires a non-conforming loan. There are also non-conventional loan options available as well. If you’re non-conforming, you may benefit from a non-conventional loan program A conventional loan, whether it is conforming or non-conforming, isn’t the only option for a borrower today. A non-conforming borrower may also be able to qualify for a non-conventional loan, such as one insured by the Federal Housing Administration (FHA). The FHA works with applicants with lower credit scores, higher debt-to-income ratios or those who have a limited amount of funds to qualify for a mortgage. There’s also the Department of Veterans Affairs (VA) that offers non-conventional mortgages for active and former military families. Both of these government- backed mortgages involve a different set of criteria compared to lenders that offer conforming loans. But what about a past or recent bankruptcy? A lot of borrowers assume they are out of the running for a mortgage after a bankruptcy. This is not the case, most notably thanks to non-conforming loans. But there are also many conventional loans available to a borrower after a certain period of time. The following are waiting periods for each type of conventional loan for borrowers who have experienced bankruptcy: Current waiting periods: VA 2 years from chapter 7 discharge. 1 year of on-time payments for a Chapter 13 Low Down payment Gov’t 2 years from chapter 7 discharge. 1 year of on-time payments for a Chapter 13 USDA 3 years for both chapter 7 & 13 Conventional 4 years for chapter 7 2 years for chapter 13 Download our free eBook here on how to get a mortgage after a bankruptcy At Blue Water Mortgage, we understand that every borrower is different. As such, our team of mortgage professionals does its best to find ways of making it work for everyone who walks through our doors, no matter if you qualify for a conventional or non-conventional loan. If you’re unsure about where you stand, contact us today to learn more about whether a non-conforming loan is right for you. Roger Odoardi Roger is an owner and licensed Loan Officer at Blue Water Mortgage. He graduated from the University of New Hampshire’s Whittemore School of Business and has been a leader in the mortgage industry for over 20 years. Roger has personally originated over 2500 residential loans and is considered to be in the top 1% of NH Loan Officers by leading national lender United Wholesale Mortgage.
