Nonconforming Loan

Secondary Mortgage Market term referring to residential mortgage loan exceeding the loan size specifications of Fannie Mae and Freddie Mac for purchasing loans in the secondary mortgage market. Because Fannie Mae and Freddy Mac are limited by federal law to purchasing loans not exceeding a certain dollar amount ($252,000 in 2000), private sector mortgage conduits have stepped in to purchase loans valued between $250,000 and $500,000.

Loan that does not meet the standards of, or is too large to be purchased by, FNMA or FHLMC. The Interest Rate is at least half a percentage point higher than for a conforming loan.
Example: Nicholas's monthly income is $10,000; he wants to buy a house that would require monthly Principal and Interest Payments of $4,000, which is a 40% ratio of his income. Currently, Fnma/Fhlmc requires that the house payment be not more than 28% of monthly income. Private lenders, who examined Nicholas's circumstances and the Appraisal in detail, are willing to make the loan. Because it is considered a higher-risk and less liquid investment (it cannot be sold to FNMA or FHLMC) than an FNMA/FHLMC conforming loan, a nonconforming loan is obtained. It requires a higher Interest Rate and/or more Discount Points.