What is a non-conforming loan, and how does it work?

Core Insights - Non-conforming loans are defined as mortgage loans that do not meet the criteria set for conforming loans, which are capped by the Federal Housing Finance Agency (FHFA) [2][12] - Fannie Mae and Freddie Mac, as government-sponsored enterprises, only purchase conforming loans, making non-conforming loans riskier for lenders [4][12] Types of Non-Conforming Loans - Common types of non-conforming loans include government-backed loans such as FHA, VA, and USDA loans, as well as jumbo loans that exceed FHFA limits [5][7] - FHA loans require a minimum credit score of 580 with a 3.5% down payment or a score of 500 with a 10% down payment [6] - VA loans have no minimum down payment requirements for qualifying military-affiliated borrowers [6] - USDA loans are designed for lower-income buyers in rural areas [6] Loan Limits and Requirements - The conforming loan limit for 2025 is set at $806,500, with a high-cost area limit of $1,209,750, increasing to $832,750 and $1,249,125 respectively in 2026 [5] - To qualify for a conforming loan, borrowers generally need a FICO credit score of at least 620 and a maximum debt-to-income ratio of 50% [5] Advantages of Non-Conforming Loans - Non-conforming loans can offer more flexible eligibility requirements, making them suitable for borrowers with lower credit scores or higher debt levels [9][10] - They provide options beyond the FHFA loan limits, allowing for potentially larger borrowing amounts [9] Disadvantages of Non-Conforming Loans - Fewer lenders offer non-conforming loans due to their higher risk, which can lead to higher interest rates compared to conforming loans [11][15] - Certain non-conforming loans may have stricter requirements, particularly jumbo loans [10][11] Interest Rates - Interest rates for non-conforming loans can vary; FHA, VA, and USDA loans typically have lower rates due to federal insurance, while jumbo loans may have rates similar to conforming loans [15]