The non-conforming home loan is a type of loan for non-traditional borrowers. Non-residents, home buyers with inconsistent employment (such as contract or seasonal work), borrowers near retirement, or buyers with little documentation or poor credit history all fall under the umbrella of those who may need a non-conforming loan. This loan typically features higher interest rates and more a longer, more difficult qualification process. The non-conforming loan can also feature a probationary period, typically 12 months, after which the higher premiums are reduced if payments have been made on time.
A non-conforming home loan is similar in focus to low documentation and no documentation home loans. Like these types of loans, the non-conforming home loan is aimed at a specific segment of the home buying market that may not be able to qualify for a traditional loan due to not matching the strict, precise criteria required by banks. Typically, non-conforming borrowers lack adequate documentation due to a variety of factors. A non conforming borrower can be:
- Retired or close to retirement
- Unemployed
- Recently moved to Australia
- A credit risk due to debt and other credit issues
- The owner of a new business and/or self-employed
- A contractual or seasonal employee
- Between jobs
The common thread of these borrowers is that they do not possess one or more factors lenders like to see when processing traditional loans. In this case, a non-conforming home loan can be an attractive option.
Advantages of Non-Conforming Home Loans
The comparison to low-doc and no-doc home loans holds up here. A key benefit of non-conforming home loans is the less rigorous amount of documentation and records required by the lenders during the process of approving a non-conforming borrower. These borrowers typically can’t provide satisfactory documentation and background information required for one of the more traditional home loan types and can benefit from the less strict guidelines of a non-conforming loan. For more information on non-conforming home loans, including a detailed look at what documentation is required and the risks involved, please complete the contact information form below.
Disadvantages of Non-Conforming Home Loans
Like other non-traditional loans (low doc, no doc, bridge loans, and low deposit loans), a major drawback to non-conforming home loans is the higher amount of fees involved and the increased interest rate. Again, just like the other alternative loan types listed here, non-conforming loans typically require lender’s mortgage insurance and allow home buyers to borrow a lower amount than they would with a traditional loan. Banks use these higher fees and lower loan amounts to mitigate the possibility of loss and default by ensuring that only the most financially secure of non-conforming borrowers can obtain these loans.
Though interest rates are higher with non-conforming loans, there is one caveat here. After a period of one time payments, the lender may lower the interest rate. Some lenders will allow non-traditional lenders to refinance their non-conforming loan after this “probationary period” in order to convert the loan to a traditional loan with better terms or lower interest.