Nonconforming Mortgage

Nonconforming Mortgage

A nonconforming mortgage is a home loan that does not meet the purchase guidelines of government-sponsored enterprises (GSEs) such as Fannie Mae and Freddie Mac, so it cannot be sold to them. Because these loans are harder for lenders to resell on the secondary market, they often carry higher interest rates and additional fees than conforming mortgages.

Key points

• Nonconforming loans cannot be purchased by Fannie Mae or Freddie Mac.
• The most common type is a jumbo mortgage (loan amount above the conforming limit).
• Loans can also be nonconforming due to low down payment, high debt-to-income ratio, credit history, property type, or documentation issues.
• Nonconforming loans offer flexibility and higher loan amounts at the cost of higher rates and fees.

How nonconforming mortgages work

Banks and mortgage lenders often sell loans to GSEs, which package them into mortgage-backed securities. GSEs only buy loans that meet their underwriting rules (conforming loans). Loans that don’t meet those rules must either remain on the lender’s balance sheet or be sold to investors or specialty buyers that handle nonconforming loans. Because nonconforming loans are more difficult to sell, lenders typically charge higher interest rates or require larger down payments to compensate for the added risk and reduced liquidity.

Common reasons a loan is nonconforming

• Loan amount exceeds the conforming limit (jumbo mortgage). For 2025, the baseline conforming limit for most U.S. counties is $806,500; high-cost areas can have limits up to $1,209,750.
• Low down payment or high loan-to-value (LTV) ratio.
• High debt-to-income (DTI) ratio (conforming guidelines typically limit DTI to about 43%).
• Lower or limited credit history (many conventional conforming loans generally require credit scores around 660 or higher).
• Incomplete or limited documentation of income/assets (non-QM loans fall into this category).
• Property issues, such as non-warrantable condos (e.g., excessive investor ownership, a large commercial component, or HOA litigation), unusual property types, or properties that don’t meet GSE property standards.

Types of nonconforming mortgages

• Jumbo loans — exceed GSE loan limits.
• Non-QM (non-qualified mortgage) — loans that don’t meet QM documentation or underwriting standards (self-employed borrowers, alternative income verification).
• Portfolio loans — kept by the lender rather than sold; underwriting and terms vary by lender.
• Specialty property loans — for properties or condo projects that GSEs consider ineligible.

Who might benefit

Nonconforming loans may suit borrowers who:
* Need a larger loan than conforming limits allow.
* Have nonstandard income documentation (e.g., self-employed, commission-based).
* Have lower or thin credit histories but can afford higher rates.
* Need more flexible underwriting than conforming products offer.

Disadvantages

• Higher interest rates and potentially higher closing costs and lender fees.
• Fewer lenders and less competition — harder to find favorable terms.
• Potentially stricter repayment or reserve requirements.
• Some nonconforming loans are sold to private investors, which can affect servicing terms.

Fees and pricing considerations

Lenders price nonconforming loans to reflect added risk and lower resaleability. Loan-level price adjustments (LLPAs) or similar fee structures can vary by credit score, down payment, and loan characteristics; these adjustments have been modified in recent years and differ by lender and loan program.

Refinancing a nonconforming loan

You can refinance a nonconforming loan. Options include refinancing into another nonconforming loan or, if your situation changes (improved credit, lower DTI, increased equity), refinancing into a conforming loan that can be sold to a GSE, potentially lowering your rate and costs.

Bottom line

Nonconforming mortgages provide necessary flexibility for borrowers who don’t fit conforming loan criteria or who need larger loan amounts. They come with tradeoffs — higher rates, fewer lender options, and possible additional fees — so compare offers, evaluate total costs, and consider whether refinancing into a conforming product may be possible in the future.