What Is a Non-Conforming Loan & How Does It Work?
Understand non-conforming loans: what they are, how they work, and why they might be a unique financing option for your home.
A non-conforming loan represents a type of mortgage that does not adhere to the standard criteria established by major entities in the mortgage market. These loans serve a specific segment of the housing finance landscape, providing options for borrowers whose financial profiles or property characteristics fall outside conventional lending guidelines. They offer flexibility for unique situations, making homeownership accessible to a wider range of individuals.
Distinguishing Conforming and Non-Conforming Loans
A conforming loan is a mortgage that meets specific guidelines set by government-sponsored enterprises (GSEs), primarily Fannie Mae and Freddie Mac. These GSEs purchase loans from lenders, providing capital for new mortgages and ensuring market liquidity.
The most prominent criterion for a conforming loan is the loan limit, which is the maximum loan amount set annually by the Federal Housing Finance Agency (FHFA). For 2025, the baseline conforming loan limit for a one-unit property in most areas is $806,500. In certain high-cost areas, this limit can extend up to $1,209,750, which is 150 percent of the baseline. A non-conforming loan, by contrast, does not meet these specific GSE guidelines, often because it exceeds established loan limits.
Key Attributes of Non-Conforming Loans
Beyond simply exceeding loan limits, various other factors can cause a mortgage to be classified as non-conforming. A borrower’s financial profile may deviate from conforming standards, such as having a lower credit score than typically required for conforming loans, or a higher debt-to-income (DTI) ratio. Additionally, individuals with non-traditional income sources, like self-employed borrowers, might find their loan categorized as non-conforming if their income verification does not align with standard documentation requirements.
Property-related aspects can also lead to a loan being non-conforming. This includes unique property types, non-standard construction, or properties intended for commercial purposes rather than solely residential use. Loans for properties that do not meet standard appraisal requirements or have certain structural characteristics may also fall into this category.
Because lenders often retain non-conforming loans in their own investment portfolios, they typically carry higher interest rates and may require higher down payments to mitigate risk. Loan terms can also be more flexible or customized to suit unique borrower or property circumstances.
Categories of Non-Conforming Loans
Jumbo loans represent one of the most common types of non-conforming mortgages. These loans are specifically designed for borrowers who need to finance properties that exceed the conforming loan limits set by the FHFA for their area. They are frequently used for high-value homes in competitive real estate markets where property prices are significantly higher than national averages. Lenders hold these larger loans in their portfolio, as they cannot be sold to Fannie Mae or Freddie Mac.
Another category includes subprime loans, which are extended to borrowers with lower credit scores or a history of credit issues. These borrowers typically do not meet the stringent credit standards required for prime lending. Subprime loans historically carried higher interest rates.
Portfolio loans are those that a lender originates and chooses to retain within its own investment portfolio, rather than selling them into the secondary market. This allows lenders greater flexibility in setting underwriting standards and loan terms, accommodating unique borrower situations or property types that do not fit conventional guidelines. Because these loans are held by the originating lender, they can be tailored to specific financial profiles or property characteristics.
Alt-A loans, or Alternative A-paper loans, occupy a middle ground between prime and subprime mortgages in terms of risk. Borrowers obtaining Alt-A loans might have good credit scores but may not meet other underwriting criteria, such as full documentation of income or assets. While less common now than prior to the 2008 financial crisis, these loans often involved less stringent documentation requirements than prime loans.