Glossary

Nonconforming Loan

A loan that does not meet the standards of, or is too large to be purchased by, FNMA or FHLMC and where the interest rate is at least ½ a percentage point higher than 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.