What Is a Nonconforming Mortgage?

As mortgage interest rates continue to climb nationwide, currently above 7%, many prospective homeowners are looking for alternatives to traditional home loans. Purchasing a home with a nonconforming mortgage may offer you greater freedom and flexibility. However, these loans can have strict guidelines for qualification and are not necessarily the best choice for every financial situation.

This page will review some of the types of nonconforming loans, their qualifications, and what factors to consider before deciding whether a nonconforming loan is right for you.

Will Mortgage Rates Go Down in 2023?

Mortgage rates depend on several factors, including inflation and the Federal Reserve’s interest rates. While the Fed does not directly determine mortgage rates, it sets trends that lenders often follow. Other economic factors, such as the unemployment rate, also have an effect: when fewer people can afford homes, lenders tend to ease the requirements for a mortgage. 

There are many factors affecting mortgage rates. Therefore, it is difficult to predict how they will change in the near future. Different sources make different predictions regarding mortgage rates.

In July, the Federal Reserve hiked its interest rate to a 22-year high, and mortgage rates followed by rising to almost 7%. Freddie Mac predicts that there will be no further hikes in the near future, meaning that mortgage rates are unlikely to increase significantly. The majority of economists believe that mortgage rates will remain above 6% until 2024 as a result of recent job gains.

The Economic Forecast Agency, on the other hand, predicts that the Federal Reserve will hike interest rates again later this year and that mortgage rates will increase as a result. According to the EFA, the average interest rate for a 30-year mortgage could climb to over 8% in June of 2024.

It is impossible to predict future mortgage rates with perfect confidence. However, most leading forecasters agree that homeowners should not expect rates to drop significantly in the near future.

Nonconforming Mortgages

Any home loan that Fannie Mae or Freddie Mac cannot insure is considered nonconforming. A loan might be nonconforming because it exceeds limits set by the FNMC and FHLMC or because a different governmental organization backs it.

Jumbo loans

Fannie Mae and Freddie Mac limit how much money they will lend for a specific property. These limits are determined by location and number of units in the property. For example, an original loan for a one-bedroom property in the mainland U.S. is limited to $726,000. Any loan that exceeds these limits is called a “jumbo loan.”

Governmental loans

Homeowners who meet specific criteria can receive loans through various governmental programs, such as the Veterans’ Association, the United States Dairy Association, and the Federal Housing Administration. Government loans are backed by the Governmental National Mortgage Association, or Ginnie Mae, rather than the FNMA or FHLMC and are therefore considered nonconforming. As opposed to jumbo loans, governmental loans are subject to limits. For example, USDA loans can be limited to $377,600, depending on location.

The Benefits of a Nonconforming Mortgage

If you qualify for a nonconforming mortgage, they offer several benefits over traditional home loans.

Higher limits

If you intend to buy a property whose value significantly exceeds Fannie Mae and Freddie Mac’s loan limits, a jumbo loan may be the best choice for you. A larger loan can help you afford a property that better suits your long-term needs. It may save you money over time by allowing you to afford a home more likely to appreciate in property value and in need of fewer expensive repairs than what you might afford with a conforming loan.

Competitive rates

While it used to be typical for jumbo loans to have higher interest rates than conforming loans, they have become more competitive as the Federal Reserve has raised interest rates and conforming mortgage trends have followed. As the average rate for conforming loans has largely increased, the gap between the rates of conforming and nonconforming loans has narrowed, meaning that a jumbo loan will not necessarily be a higher risk to the homeowner.

Factors To Consider Before Applying for a Nonconforming Mortgage

If you intend to apply for a nonconforming loan, keep in mind that lenders will have stricter requirements for you than for someone seeking a conforming loan. You will have to have a high credit score, a low debt-to-income ratio, and proof that you have enough cash to afford the first 6 to 12 months of your mortgage. You will also likely have to provide a larger down payment than you would for a smaller loan. Buyers can put down as little as 3% for a conforming loan, while private lenders often request a higher down payment for a jumbo loan.

Eligibility and Qualification for Nonconforming Loans

Private lenders handle jumbo loans and, therefore, do not have any centralized qualifications. However, most lenders will expect you to meet certain standards of financial stability.

You should have a high credit score when applying for a nonconforming loan. FICO scores of 670 and higher are considered “good.” A credit score of 700 or higher will help your chances of being approved.

Lenders will also look for a low debt-to-income ratio, or DTI. Fannie Mae requires borrowers to have a 36% DTI or lower, though there are some exceptions. A private lender will most likely have similar requirements.

Jumbo loans are risky for lenders, and you will want to be especially sure that your finances are stable. They might ask to see bank statements, tax returns, and W2 forms to prove that you have a steady income stream.

How To Apply for a Nonconforming Mortgage

• Find a lender. Many major banks offer jumbo loans. Compare their minimum requirements, down payments, and interest rates to see which lender best fits your needs.

• Make sure that you are qualified for your nonconforming mortgage. Ensure that your credit score and DTI meet your lender’s minimum requirements. 

• Check your finances. If you have any outstanding debts, pay off what you can afford. Check your credit report for any errors, such as closed credit lines being reported as open or timely payments that were reported as late, and file a dispute to have them fixed.

• Save money. In addition to a down payment and closing costs, your lender might ask for as much as your first six months’ payment in advance.

• Prepare your paperwork. Your lender will likely require a good amount of financial information as proof that you can afford to pay back your loan. Make sure that you have access to recent bank statements, tax returns, and W2 and/or 1099 forms.

• Get pre-approved by your lender. Pre-approval is non-binding and will give you a clear picture of how much your loan will cost.

• Cooperate throughout the underwriting process. A jumbo loan is a significant risk for a lender, and they will need to pay close attention to your finances before lending to you. Your lender’s underwriter might request detailed information, such as the source of a recent bank deposit. Quick and clear responses will make them more likely to loan to you.

• Submit your down payment. Your lender will require a certain minimum down payment and may offer a lower interest rate for a higher down payment. A higher down payment will also lower your monthly payments.

Source: https://www.usa.gov/credit-report-errors

Why Would Someone Get a Nonconforming Mortgage?

Someone might opt for a nonconforming loan over a conforming loan for a number of reasons. If home prices in your area are higher than what you could afford with a conforming loan, a jumbo loan can keep you from being priced out. For some buyers, the barrier to a jumbo loan is not the total value but the interest rate. As interest rates for mortgages have climbed over 7%, some homeowners might find that, with a jumbo loan, they can afford a more desirable property without owing substantially more interest.

Someone who qualifies for a governmental loan might opt for one over a conventional mortgage. VA and USDA loans do not require down payments, and interest rates can be much lower than those for conforming loans.

How To Find a Mortgage Finance Company

If you are considering a nonconforming mortgage, talk to a financial advisor about which type of loan best suits you and your family. Expertise.com’s financial advisor directory can help you find a trustworthy professional. When you are ready to start looking for a lender, try Expertise.com’s mortgage broker directory to find a broker that works for you.