Non-conforming loans offer an alternative to traditional loans from standard banks.
They are geared towards people who would otherwise be unable to receive financing from traditional banks.
If you find yourself unsure whether you will meet the criteria to have your home loan approved, a non-conforming loan might be suitable for you.
This article will discuss some of the main types of non-conforming loans, how they work, and what you need to know before applying for one.
Who Should Apply For Non Conforming Loans?
There are many reasons why someone may not be eligible for a standard loan from conforming lenders, including:
- a poor credit history,
- a previously declared bankruptcy,
- multiple declined loan applications on your record,
- being self-employed and not having up to date financials as required,
- not having a solid income or regular payslips (as a business owner, or contractor or freelancer where you regularly change jobs),
- you have recently started a new business,
- an outstanding ATO debt,
- multiple streams of debt, and
- little proof of savings for a deposit (either no savings or the deposit was inherited or gifted).
Conforming lenders require a good record of these things for the home loan approval to prove that the borrower is low risk and won’t dishonour their loan repayments.
Non-conforming loans can provide solutions that other types of financing don’t offer.
The aim is to give people who don’t meet the standard lending criteria an opportunity and make it easier for them to buy their own homes or build wealth through investment properties.
How Does a Non-Conforming Home Loan Work?
Structurally, non-conforming home loans work very similarly to traditional home loans.
The main similarities are that both types of home loans offer:
- a fixed, variable or split interest rate, and
- features like an offset account or redraw facility
The differences lie in the fees and interest rate.
The repayment conditions are more strict than traditional home loans to provide a non-conforming lender with extra insurance if you default on payments. The lender needs to charge you higher rates and fees to cover their additional risk from lending without collateral.
How Much More Expensive Are These Types of Home Loans?
Like with standard lenders, the amount of interest on a non-conforming mortgage varies depending on:
- the purpose for which it was taken out (refinance, purchase etc.),
- the term of your loan period
- how flexible you want your repayment schedule to be, and
- the percentage of loan to valuation of the property.
How much more non-conforming lenders charge depends on how complex your home loan application is.
For example, if you can’t prove a regular income like a standard monthly salary, but you earn a high income irregularly and don’t have high expenses, you could be charged between 0.5% to 1% higher interest rate than a standard home loan.
If, on the other hand, your previous credit history shows extensive defaulting payments and bad debt, your non-conforming loan can be charged at 1% to 5% more than a regular home loan.
What Are the Different Types of Non-Conforming Home Loans?
The two most popular non-conforming home loan types are:
- bad credit home loans, and
- debt consolidation home loans with late payments.
People looking for smaller loans (such as personal loans) but are bankrupt can apply for a non-conforming bankruptcy loan.
1) Bad Credit Home Loan
Bad credit home loans are an option if you have a below-average credit rating. To be a good candidate for a bad credit home loan, you should have financial statements to prove a reliable income.
Non-conforming lenders will pay close attention to why you got into the situation of your bad credit in the past, but unlike traditional leading lenders, they’ll put the past aside and focus on the proof that your financial situation has significantly changed since then, such as you got a well-paying job in a good industry.
In this case, lenders offer the same features as conforming mortgages, but they come with a higher rate depending on your individual situation and circumstances with the addition of risk fee in most cases.
2) Debt Consolidation Home Loan
Debt consolidation home loans are designed specifically for people who have trouble managing their monthly repayments or find themselves unable to meet their current obligations in general.
They allow borrowers to combine all of their outstanding debt repayments into one lump sum. This is then paid off over a longer time, meaning more financial freedom in the short term but paying more in interest over the long haul.
Instead of managing multiple accounts and repayments, the idea with this type of loan is that borrowers only have to focus on one large monthly repayment. Thus, you won’t miss any more payments.
What About Low Doc Loans?
While a low documentation loan can be approved with less documentation than a standard home loan, they require a lot more than what a non-conforming home loan approval does.
Low doc loans usually require you to:
- put down at least 20% deposit,
- have a consistently good credit history, and
- have proof of at least one year of continuous income.
Non-conforming home loans are created for those who don’t meet the requirements or standards of a traditional bank.
Luckily, they can still be property owners – but with a little extra help. Employing the service of expert mortgage brokers can increase your chances of successfully applying for these types of loans.
A specialist mortgage broker from the Mortgage Agency can look at your personal financial situation, both past and present, and provide tailored advice to best suit your circumstances.
- Help you find non-conforming lenders. While conventional banks are plentiful, private lenders who offer these loans are not easy to find.
- Introduce you to more than one non-conforming lender. This way, you can together weigh up which is best suited to your needs and your budget.
- Use their years of experience to help you prepare your paperwork to have the best possible loan application and the chance of being approved.
At the Mortgage Agency, we strive to help every one of our customers become homeowners, no matter their circumstances. Contact us today to see how we can help you, too!
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.