What is a nonconforming loan?

A nonconforming loan is defined as a loan that does not meet the established guidelines set by the secondary mortgage markets, such as those set by Fannie Mae and Freddie Mac. These guidelines typically include considerations regarding loan amount, borrower creditworthiness, property type, and documentation requirements. Because nonconforming loans deviate from these standards, they are deemed not suitable for sale in the secondary market, which can impact the lender's funding and the loan's terms.

The nature of a nonconforming loan may involve various factors, such as exceeding the maximum loan amount set by the conventional loan standards, having a unique property type, or featuring specific borrower circumstances that don't align with standard criteria. This makes them generally riskier for lenders and may result in different interest rates or terms compared to conforming loans.

On the other hand, criteria like meeting secondary market requirements are indicative of a conforming loan, while a conventional loan can refer to a loan that is not insured or guaranteed by a government entity, and it can be either conforming or nonconforming. Therefore, defining a nonconforming loan as one that does not meet secondary market requirements encapsulates the essence of its classification accurately.