Most home buyers have only heard of the conventional 30 year fixed loan and the FHA loan. Many folks consider these types of loans their only options when purchasing a home. However, there’s a large inventory of non-conforming loans that exist out there. Below are a few examples of non-conforming loans and how we’ve used them to our advantage to buy homes after our short sale. These types of loans may help you out too!
What is a non-conforming home loan?
The loans most people use are conforming loans such as VA loans, FHA loans, and conventional loans, which all adhere to Fannie Mae and Freddie Mac guidelines. Fannie Mae and Freddie Mac are federal guidelines set by the government.
Think of a non-conforming loan as creative financing! A non-conforming mortgage is a home loan that does not adhere to the loan purchasing guidelines set by the Federal National Mortgage Association /Federal Home Loan Mortgage Corporation (Fannie Mae and Freddie Mac). In other words, these non-conforming loans fail to meet the government- set bank criteria that is necessary for funding. Some reasons that a non-conforming loan may be needed include:
- The loan amount is higher than the conforming loan limit. I’ll discuss this more in the Jumbo Loan Section below. But the short version is that people can only get loans for certain purchase amounts in each housing market. For example, maybe the maximum purchase price for that county is $600,000 but you want to buy a home for $680,000. Sometimes, buyers (especially those buying multi-unit properties) need to buy the home at a higher amount. A non-conforming loan allows the lender to provide this to the buyer.
- The buyer has a lack of sufficient credit or sub-par credit. This happened to us after our short sale. The short sale left a mark on our credit, pretty much saying we were risky buyers. To prevent another housing crash, the government put out strict requirements on who could get a mortgage. And those with a short-sale (like us!) weren’t on the list of great buyers. The only way we could get a loan was through someone who would take a chance on us based on our debt-to-income ratio. Thankfully, our debt to income ratio was pretty stellar!
Why do I need a non-conforming loan?
You might not. We needed to find one after our short sale. Like I said above, a non-conforming loan is great for people who have no credit, have went through a short-sale or other credit damaging event, or want to buy a property valued higher than the conforming limit. Think of these non-conforming loans as Plan B when your Plan A doesn’t work out.
We used a portfolio loan to buy our four-plex in Denver. Portfolio loans are a risk for any bank who writes them. A portfolio loan is written in-house at some banks and often at credit unions. We got a portfolio loan through BBVA Compass back in 2014. They have a small section of their business dedicated specifically to writing portfolio loans.
For background, when we went to buy our four-plex, we were only 3 years out from our short sale. Since we were only 3 years out, we didn’t qualify for conventional loans or FHA loans yet. (Short sales don’t fall off your credit record until 4 years after closing!).
Credit unions are also a great place for obtaining a portfolio loan. Credit unions don’t have to adhere to the same criteria as those national banks because credit unions write their loans in-house. We used a portfolio loan from the credit union to buy our cabin, when were only one year out from our short sale. The credit union wrote us an in-house loan for 20% down. We couldn’t use our credit union who gave us the cabin loan either since didn’t have the 20 percent to put down on our four-plex.
Portfolio loans are essentially a risk for the bank. The credit unions and banks who write portfolio loans have to make sure they vet their borrowers heavily. These banks and credit unions understand that some buyers have had a financial hardship which they have overcome. Short-sales and foreclosures were pretty common between 2008 and 2012. Be prepared to demonstrate to the bank how you’ve overcome your financial issues and show the bank that you make money now. We had to write letters and provide multiple references and bank and income statements. It was a long process, but so worth it!
Jumbo Loans are for what it sounds like. These are a type of non-conforming loan that do not meet the guidelines for conforming Loans because of their enormous loan size. The amount that qualifies for a jumbo loan varies by market. For example, the limit for a jumbo loan in Anchorage, Alaska is much different than the limit for a Jumbo Loan in Manhattan.
A simple internet search of “Jumbo Loan Limits” will provide information on the Jumbo limit home loan amount for your market or you can get basic information here. We qualified for a jumbo loan in Denver, because we needed a loan for over $450,000 for our four-plex. The limit to qualify for jumbo loan in Denver is now $458,000, but it wasn’t in 2014.
There’s even some loans that go into “Super Jumbo Loan” territory. These are generally for properties valued at over $1 million dollars.
The process for getting a Jumbo loan is very similar to getting a portfolio loan. Be prepared to show income statements and provide projected forecasts for rents (if it’s a multi-unit).
Hard Money Loans
These are completely different than the portfolio and Jumbo loans mentioned above. These hard money loans aren’t even offered through banks, but through individuals. Because of this, these hard money loans have stupid high interest rates, but can be good in a pinch. Think of hard-money loans as what loan sharks used to do back in the day. These lenders are generally individuals who have money to spare. They loan their money to individual investors at a high interest rate and over a shorter period of time.
These hard money loans can come in handy for a small amount for a down payment for a home. There’s tons of these lenders in each urban market. And it’s a great deal for the lender, who gets a hefty return on the amount they loan.
Is there any down-side to a using non-conforming loan?
Yep. Although there are some great perks associated with using a non-conforming loan, there are some downsides too. The biggest perk is that banks will finance your home purchase. (Hooray!) Down-sides of using a non-conforming loan include the following:
- Increased Interest Rates: Non-Conforming loans usually have higher interest rates than compared to Conforming Loans. This is due to the higher risks associated with non-conforming loans. We paid over 4% for our loan when most people were getting near 3.5%.
- Slow (like a turtle on sedatives speed), slow underwriting processes: Blame this on the extra documentation and paperwork needed to get an approval on non-conforming loans. The underwriting of non-conforming loans may be more detailed, which may require the borrower to produce more documentation. (We have a whole file of documents we provided!) This increases the time and cost needed to close a loan.
- Time Consuming Approvals: To lower their lending risk, the lender usually requires non-conforming loans to be approved by additional underwriters. This increases the time needed to close a loan. And underwriters constantly lose things, so be prepared to send the same document multiple times.
How do I find a lender in my area?
When we were going through the process, I searched on the internet for a list of non-conforming lenders. There wasn’t one then and there still isn’t one now. My suggestion, do what we did, and simply do a search for “non-conforming lenders in XXXX” and put your city in the “XXXX”. That’s how we found lenders in Denver. And then we literally called down the names we say listed on Google. Was it time-consuming? Yes. Did we get told no a lot? Yes. But did we get a non-conforming loan to buy our house? Yes!
Remember, no one will give you a loan unless you ask. Keep asking until you get a yes. Where there is a will, there is a way!