Once you begin to drill down into the many options that you have available to finance a home, you may become overwhelmed. The choices can become fairly complex, and the non conforming loan is not the easiest package to decipher. However, it may be the best package for you. Here are the basics of the non conforming loan so that you can make an informed decision about its use in your home loan efforts.
What Is a Non Conforming Loan?
The non conforming loan is so named to provide a clear distinction from the conforming loan, a loan that conforms to a standard that is set by government sponsored entities (GSEs). GSEs include Fannie Mae and Freddie Mac, institutions that are set up by the Congress specifically to aid in the homeownership efforts of private citizens. The conforming loan limit is set at $417,000 in most municipalities, meaning that the non conforming loan cannot, by definition, have this limit. A non conforming loan usually has higher fees and interest rates associated with it as well because of the reduced stability that the higher limits create within the secondary market.
Are There Any Other Names for a Non Conforming Loan?
A non conforming loan is also commonly known as a jumbo loan.
When Is a Non Conforming Loan Usually Implemented?
Although there are no lending limits on the non conforming loan, the tool is most associated with low and mid-tier income borrowers who tend to be more price conscious. As such, most of them would rather have the lower interest rates and fees that are associated with a conforming loan. This does not mean that a non conforming loan is bad, as it is a necessity for properties that cannot be sold for a price that is under the loan limit of a conforming loan. However, the non conforming package has a reputation of being offered only when a borrower who is looking for a conforming loan cannot qualify for one.
What Are the Reasons a Borrower Might Be Rejected for a Non Conforming Loan?
Borrowers must maintain a certain level of credit to qualify for a conforming loan. In most cases, anyone with a credit score below 620 will automatically be kicked into a non conforming loan program for assessment. Borrowers with a history of paying late on large assets may also not qualify for a conforming loan even if the credit score minimum is reached. Other metrics that may cause a borrower to be forced to choose a non conforming loan include a high debt to income ratio, a low down payment, or a spotty employment history. In most cases, self-employed people will not be able to qualify for a conforming loan, meaning that many small business operators are under the non conforming loan program.
Are These High Standards?
Although the above are general guidelines as to the eligibility of a borrower for a conforming loan, they are not hard and fast rules. The government and lenders can work out many different programs that can accommodate a borrower: For instance, a borrower that is working within a Fannie Mae 97 percent loan program will only need three percent of the total home price instead of the normal 20 percent to qualify and stay within the conforming loan program.
Is a Non Conforming Loan Right for Me?
As mentioned before, a non conforming loan has a reputation of being a secondary choice. However, this does not mean that it is. You may actually benefit from a non conforming loan, especially if you are on the cusp of the conforming loan limit.
While it is true that the naked non conforming loan package comes with higher interest rates and fees than a conforming loan, it is also true that you can negotiate these fees and rates down more easily if your financial records are in order. Because you have the ability to take a larger amount of money, you also have the ability to organize your finances in a way that will allow this. Assuming that you have the appropriate income and low enough expenses, you may be able to negotiate a lower rate and fees than you could have gotten with a conforming loan package.
You also gain the advantage of being able to buy more house. Not everything about real estate is money; your comfort is important as well. More money in your loan package means more options for the amenities that you choose as well as the neighborhood culture that you can afford. This is not an advantage to be sneezed at, as borrowers who are limited to under $500,000 tend to have trouble finding anything beyond a first home in a neighborhood that may not have the access to thoroughfares that are needed for convenient commutes to and from employment.
In short, do not dismiss the non conforming loan. Take a hard look at your finances and determine your needs from the choices that you have. This will provide you the best loan program, not copying others blindly.
2 Point Highlight
The government and lenders can work out many different programs that can accommodate a borrower: For instance, a borrower that is working within a Fannie Mae 97 percent loan program will only need three percent of the total home price instead of the normal 20 percent in order to qualify and stay within the conforming loan program.
While it is true that the naked non conforming loan package comes with higher interest rates and fees than a conforming loan, it is also true that you can negotiate these fees and rates down more easily if your financial records are in order.
