A non-conforming loan is different from conventional lending standards.
So, let’s talk about conforming loans first. A conforming loan is an ordinary, conventional mortgage, not a loan guaranteed by a government agency. Each year, the Federal Housing Finance Agency sets “compliant lending limits”. These limits establish the maximum amount you can borrow for a single-family home.
The limits are designed to prevent excessive borrowing and foreclosures. This protects both the borrower and the lender. Lenders are able to insure conforming loans and sell the loans. It is important for lenders to be able to sell the loans they make, as this gives them more money to continue lending. Mortgages are usually sold to government-sponsored companies, Fannie Mae and Freddie Mac.
In the continental United States, the conforming loan limit for 2022 is $647,200. In some parts of the country, the limit is higher. In Alaska, Hawaii, Guam and the US Virgin Islands the limit is $970,800.
You can always borrow more, but since these loans do not conform to loan limits, they are considered jumbo loans and have different requirements.
The requirements for non-conforming loans are different from those for conforming loans. For example, while most lenders require a credit score of 620-680 for a conforming loan, they probably expect a credit score of at least 700-740 for a non-conforming loan. The best interest rates will likely require a higher credit score.
The down payment requirement could also be higher. The lender may well expect a down payment of 20% or more, compared to 3% to 10% on some conventional mortgages.
They may also have different requirements for borrowers’ debt to income ratio (the DTI ratio). For a conforming loan, a good DTI is 36% or less, but some lenders accept 43%. Sometimes a non-conforming loan will be better for someone who has higher debt relative to their income.