A non-conforming loan is any loan that doesn’t adhere to the Fannie Mae and Freddie Mac lending guidelines. These government-sponsored enterprises (GSEs) have certain rules that loans—referred to as “conforming loans”—have to meet regarding loan amount and credit score.

Other restrictions may also apply depending on the property, location, and other details of the transaction. If your loan is above the conforming loan limit determined by Fannie and Freddie, for example, it’s a non-conforming loan.

Aside from loan amounts, non-conforming loans are there to accommodate borrowers who fall outside the conforming loan criteria for a number of reasons. These loans are also referred to as non-qualified mortgages or non-QMs. Non-conforming loan program offerings may differ from mortgage lender to mortgage lender, but all are designed to solve the problems many borrowers face qualifying for a home loan due to self-employment, income from multiple sources, or even a credit ding in the past.

Here’s a look at some of the advantages non-conforming loans bring to homebuyers.

1. Flexible Terms

It’s in the name: Non-conforming loans are here to go against the grain. As such, they offer more flexibility than traditional lending guidelines. The looser rules with non-conforming loans allow lenders to create loan programs that meet borrowers where they are. This can mean a rate that is fixed for a specific amount of time before changing to an adjustable rate—or it can mean loan terms outside of the standard 15- or 30-year terms. Sell your home in Shreveport La.

2. More Purchasing Options

Non-conforming loans are doing their own thing, right? So it’s no surprise that these lending vehicles can fund a broader choice of real estate than conforming loans. These include non-warrantable condos and co-ops, in addition to timeshares, fractional ownerships, units in assisted living communities, multi-unit condos, and units in projects that require a membership—such as a country club or a golf course—before you can buy. Non-conforming loans can also be used to purchase a condo that is currently in litigation.

Assets like condos or co-ops are typically considered non-warrantable if:

• The project is still under construction.
• Short-term rentals are allowed.
• A single entity owns more than 10% of all the units.
• The majority of the units are rented to non-owners.
• The project’s developer has yet to turn over control of the HOA to the owners.

Remember, when you buy a unit in a larger project, your credit status isn’t the only one lenders must take into account. They will need to assess the developer’s credit as well and look at the project as a whole. For this reason, many borrowers within larger projects opt for non-conforming loans.

3. Credit Leniency

Non-conforming loan guidelines tend to have significantly more leeway when it comes to terms than conforming loans can offer. This extends to credit scores as well.

Conforming loans require a minimum credit score of 620. Do you know the credit score requirement for non-conforming loans? You’re right. They don’t have any.

Now, this doesn’t mean it’s a free-for-all out there in the non-conforming world. It simply means that lenders have more leeway over the credit terms than with more stringent loan programs.

Many borrowers with lower credit scores or credit report challenges seek out non-conforming loans for this reason. Since every loan program is different, you’ll want to discuss your unique financial situation, including your goals and any challenges and/or concerns you may have. 

APM is happy to sit down with you and go over this before you apply to ensure that you know what your options are.

4. Flexible Income Verification

Verifying your income is a pivotal part of the loan application process, particularly since your debt-to-income ratio (DTI) has such a large impact on whether or not you can qualify for a loan.

This isn’t the case with non-conforming loans—or at least it doesn’t have to be. Income can be verified in a lot of nontraditional ways, such as bank statements or other documents that can prove your personal finances and income, or it can not be verified at all, depending on other factors of the transaction.

A non-conforming mortgage can take other parts of your financial picture into consideration, including your overall cash flow, home equity, and assets. For these reasons, non-conforming loans are often preferred by the self-employed and those who work on seasonal commissions.

These loans aren’t offered by all lenders, and they may come with additional terms, such as a higher interest rate or credit requirement, but they can be well worth it for borrowers who can’t qualify through the traditional route that involves income verification.

5. Lower Down Payments

Government-backed loans, including VA, USDA, and FHA loans, are also considered non-conforming. These loans tend to have lower down payment requirements than traditional conforming loans for those looking to buy a home. In fact, VA loans can even offer $0 down, with FHA loans going as low as 3.5% down.

Jumbo loans, another type of non-conforming loan, can offer as little as 5% down, though most lenders require somewhere between 10% and 15%.

Getting the Best Deal on a Home Loan

You might have noticed that “interest rate” was not one of the benefits listed above. That’s because this variable really depends on your situation and the type of non-conforming loan you’re applying for. 

Certain loan programs like VA (a loan guaranteed by the U.S. Department of Veterans Affairs) and FHA can offer very attractive rates, while other programs, like a bank statement loan, carry higher rates in return for perks like limited income verification. 

Like conforming loans, the terms you lock in for a non-conforming loan will be influenced by many factors. These include how much you want to borrow, the size of your down payment, your credit score, the exact loan program you apply for, and the type of property you want to purchase.

Let’s face it: Looking for a home isn’t always as fun as it sounds. Cruising Zillow may have become a national pastime, but when it comes to actually pulling the trigger, frustration can sometimes overshadow the fun. Buying a home not only involves finding a house you’re in love with—which can be a feat in and of itself—but you also have to compete with other bidders who love that home just as much as you do. 

For these reasons, many homebuyers consider building a home instead. Of course, this decision isn’t right for everyone. There are pros and cons to buying a home versus building a custom home.

Pros 

Build your dream home: Buying a home often involves choosing between either the right features or your favorite location. A custom home will be “perfect” from the start once construction is completed, so you won’t need to remodel.

New tech: A new home will have energy-efficient technology that can save you money over the long run. You can also have the newest time-saving gadgets installed with a custom home.

A fresh start: When you buy a previously owned home, you cross your fingers and hope your inspector caught most of the glaring issues. Even if everything looked okay at inspection, you never know when something may need a repair. With new home construction, a warranty should cover any unexpected issues.

Cons

It can be expensive: Depending on the type of construction loan, you’re almost sure to have a higher interest rate while construction is being completed on your custom home due to the high risks involved. Typically, the more customized the home, the higher the price. Spec homes and semi-custom homes can be less expensive. The good news is that the payments are low (typically interest-only) and can be paid monthly, paid ahead as a lump sum, or even rolled into the loan itself.

It takes time: Any type of custom home will require more decisions, time, and stress than buying an existing home. Make sure you’re ready for that commitment and the home construction process.

Expect the unexpected: Costs and timelines may go over what is planned with custom home construction. You would most likely have to cover those costs out of pocket. Increased timelines could also lead to issues with selling your current home.

Construction Loans

Construction loans allow you to pay a builder while your home is under construction. APM offers a construction only loan, which is also known as a “two-time close” construction loan. This option includes both a construction loan that lasts through the construction period and permanent financing when construction is completed.

There are several advantages to this setup:​

• You get lower payments while your home is being built (interest-only and can be financed into the loan).
• You don’t need to sell your current home right away to qualify.
• If construction costs go over, they could be covered in the permanent loan (pending appraisal).
• Does not tie up your builder’s credit line.

But you should also be aware of a couple of disadvantages: ​

• You will need to qualify for the loan twice​ (beginning and end).
• You will pay closing costs and appraisals twice​.

Construction Loan Vs. Traditional Loan

The construction loan process is very similar to a traditional loan, but there are a few key differences:

Traditional loan

• You need to be approved only once, and your loan lasts until it’s paid off (or refinanced).
• The entire amount owed is paid to the seller after closing.
• The home can be used as collateral if something goes wrong, which equals lower risks and fees.
• You pay off both your interest and principal in each monthly payment.
• You keep this loan until it’s paid off.

Construction loan

• You have to get approved for two loans.
• Payments are made to the builder in installments based on completed work.
• Land might be the only collateral, so there are higher risks and fees.
• You pay only interest during construction (up front, monthly, or rolled into the loan).

Questions to Ask Yourself While Deciding

What is my budget?

You don’t want to fall in love with a home and then find out you can’t afford it, so figure out your budget first. APM’s loan officers can discuss loan options with you. 

What type of construction am I interested in?

There are custom, semi-custom, and pre-planned options available. 

• A custom home lets you control every aspect, including the floor plan, but it also comes with more costs and a lot more time and decisions. 
• Semi-custom is usually available in higher-end developments. This is a good middle ground as you can still pick features but don’t have to decide every detail that comes with a custom home. 
• Production homes are pre-designed developments that usually cost less and sometimes come with small, unique add-ons to make it your own.

Who will be my builder/general contractor?

Do your research. Builders usually have developments they’re working on, so tour a model home to get an idea of their features. If you go with a custom home, you’ll need to find a general contractor who will work as the construction manager. We recommend obtaining your own recommendations and references, and then checking with the Better Business Bureau and the National Association of Home Builders before signing any contracts.

What location am I looking for?

One of the advantages of home construction is building the perfect dwelling in the ideal location. So you get to decide: Do you want to live in a development or find your own lot?

Remember to ask questions about any HOAs in the area. Each will have its own rules and costs. And think about local schools, grocery stores, utilities, and commute times.

What custom home features do I want?

This is the best part of home construction! You get to choose your custom home features. Tour homes, go to home improvement stores, and look online at new energy-efficient tech and features.

Think about size, how the sun hits the home, the layout, whether you want a basement, and more. Remember to consider your future needs, including rooms for kids or a yard for a dog.

What’s my timeline?

If you want to move into a new home immediately, custom home construction might not be right for you. Construction itself usually takes four to twelve months, not including your research time.

Custom Build Expenses

Custom home construction costs vary greatly based on square footage, location, features, and materials. Costs in 2021 ranged from $100 to $500 per square foot, but are usually between $100 and $200. The average price range in the U.S. for a 2,500-square-foot home was about $250,000 to $500,000.

Here’s how those costs break down:

• Pre-construction (design, permits): 10% to 25%
• Land and site work: 3% to 8%
• Foundation: 10% to 15%
• Framing: 10% to 20%
• Exterior work: 15% to 20%
• Major systems (electric, HVAC): 10% to 15%
• Interior finishes (drywall, floors): 25% to 35%

Additional features—including decks, pools, or landscaping—will add to your total.