What is a "non-conforming loan"?

• A. A loan that meets Fannie Mae and Freddie Mac criteria
• B. A loan that adheres to conventional lending standards
• C. A loan that does not meet the criteria of Fannie Mae and Freddie Mac
• D. A loan that is automatically approved through automation

Answer: (C)

A non-conforming loan is characterized by its failure to meet the specific criteria set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that provide liquidity in the mortgage market. These criteria typically involve limits on loan amounts, borrower creditworthiness, and other underwriting standards.

When a loan does not conform to these guidelines, it is often categorized as a non-conforming loan, usually because its loan amount exceeds the maximum set by these entities, or the borrower's financial profile does not align with the credit standards required for conforming loans. Non-conforming loans can include jumbo loans, which are larger than the maximum conforming loan limits, and loans for borrowers with less-than-perfect credit that might not qualify for conventional lending.

Understanding the distinction is important as non-conforming loans typically come with different terms, interest rates, and risk assessments compared to conforming loans, which can affect borrowers' options and lender requirements.