What defines a non-conforming loan?

A non-conforming loan is specifically characterized as a loan that does not meet the guidelines set by Fannie Mae or Freddie Mac, which are government-sponsored enterprises that buy and securitize mortgages. These loans are often referred to as “jumbo loans” and typically have terms that exceed the conforming loan limits set by these entities.

The essential aspect that defines a non-conforming loan is its inability to be sold on the secondary market to these government-sponsored entities, often due to factors such as high loan amounts, unique property types, or borrower credit profiles that fall outside conventional lending standards. Non-conforming loans may cater to borrowers who do not fit traditional mold, thus filling a crucial niche within the mortgage industry.

While conforming loans are those that fit within the criteria established for purchase by Fannie Mae and Freddie Mac, non-conforming loans specifically exist outside those standards. Therefore, the correct understanding of a non-conforming loan lies in its inability to be sold to these secondary market entities.