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How the Non-Conforming Loan Differs from the Conforming Loan

The loans are called many names. As the bi-polar opposite of its cousin, the conforming loan, non-conforming loans belong to the conventional loan family. The less formal name for non-conforming loans is called ‘sub-prime’ loans. The flexibility and non-standardized guidelines of non-conforming loans is optimal for the person with impaired credit or an extenuating financing scenario.

With the non-conforming loans, the rules of the loan generally vary from lending institution to lending institution. Not to mention, the same lenders are entitled to modify their guidelines as often as month- to-month. The reason that some lenders or borrowers refer to non-conforming as “sub-prime” is because the loans are devised for the customer or prospective borrower who has blemished credit. Another scenario, where a sub prime loan is ideal for a potential homeowner, is when the person is self-employed and the income is not verifiable.

As each lending institution or mortgage company has their own set of guidelines and criteria for borrowers to meet, the numerous loan programs are too vast to detail. Nevertheless, sub prime or non-conforming loans are rated based on creditworthiness. Verisimilar to the educational grading system, the non-conforming or sub prime loan is rated according to the following grades ‘A,’ ‘B,’ ‘C’ and ‘D.’

Extenuating circumstances that may necessitate a sub prime or non-conforming loan:

• Poor credit rating

• A high debt ratio to income

• Self-employment

• The filing of a bankruptcy

• A minimal – moderate down-payment

In the refinance and investor loans, non-conforming loans have been a growing trend in the mortgage industry. As each lender employs specific guidelines in the loan application approval process, the criteria for sub-prime loans are more forgiving, lenient and lax than for a conforming mortgage loan.