If you’ve been told that a conventional loan won’t work for you, a non-conforming loan may be the solution to finance the home of your dreams. But what exactly is a non-conforming loan?
Non-conforming loans are mortgages that do not follow the rules for government backed loan purchasers Fannie Mae and Freddie Mac. Non-conforming loans are usually made by private lenders like Members Trust, who specify the requirements that borrowers must meet for loan approval. That’s because the lender keeps these non-conforming loans in their loan portfolio rather than resell them to Fannie Mae or Freddie Mac. As a result, you can typically find greater flexibility in the underwriting standards.
Non-conforming loans provide personalized solutions to many borrowers with unique needs. With a non-conforming loan, the loan amounts are more flexible, and the terms may be shorter because you can finance things such as:
- Raw land
- Large acreage
- Construction of your dream home
- Non-traditional houses like barn homes, cabins, seasonal homes, etc.
The Nuts and Bolts of Non-Conforming Loans
Because non-conforming loan amounts are higher and meet a unique set of needs, you can also expect to see some unique qualities.
Higher Interest Rate
Be prepared that the interest rate on a non-conforming loan is almost always higher than on a conforming loan, due to the unique nature and size of the loan. Lenders try to be competitive and keep interest rates as low as possible.
Higher Closing Costs and Fees
Closing costs and fees are may be higher on a non-conforming jumbo mortgage because fees are calculated as a percentage of the mortgage balance. A larger loan balance means higher fees. However, if the non-conforming loan is for land, construction or a unique housing situation, the closing costs and fees are comparable to a conforming loan.
Higher Down Payment
Some lenders will accept a down payment of only 10%, but they will usually also require private mortgage insurance with 10% down. Most lenders require a down payment of around 20% or even a little more, for a non-conforming loan. They want to see that the borrower is also invested in the purchase.
More Extensive Documentation
Because non-conforming loans meet unique needs, be prepared to provide the lender with detailed documentation such as several years of income tax returns, pay stubs, bank statements, and other items. This will assist the lender in qualifying you for a non-conforming loan.
Bottom line – non-conforming loans help fill a mortgage loan gap for many borrowers. If you have a unique need or situation, your only choice may be to get a non-conforming loan. Members Trust has extensive experience providing mortgage solutions to meet those needs. Not all mortgage lenders are created equal, so if you need a non-conforming loan, work with someone you trust and who can provide an affordable solution.