A non-conforming home loan is a product for people who may have difficulty obtaining normal loans from banks and major lenders to purchase a home.
Standard lending criteria can be pretty strict, and your loan application may be declined if you don’t fit within those guidelines. In such a scenario, you may be refused credit as the bank does not consider your circumstances to be ‘normal or ‘conforming’.
At these times, non-conforming loans may come in handy, helping you to purchase your dream home.
Here’s a read on everything you need to know about these types of loans and how to access them without any hitch.
How Do Non-Conforming Home Loans Work?
Non-conforming home loans do not involve the standard application criteria of regular home loans.
In fact, non-conforming lenders are willing to offer you a home loan as long as you provide evidence of your capability to repay the loan. Notably, not all non-bank lenders are non-conforming.
However, in many ways, non-conforming home loans work similarly to standard home loans. You must first apply to a relevant credit provider and check if you can access variable, fixed or split rate loans.
Based on lending criteria and the loan type, you may also be able to avail of loan features such as redraw and an offset account, which can help you to manage your repayments.
Furthermore, if you are offered the flexibility to make extra repayments, you can pay off your home loan sooner.
Your non-conforming lender will only offer you a loan so long as they are assured about your repayment capacity. Therefore, you cannot assume that working with a non-conforming lender guarantees your access to a non-standard home loan.
For example, if you are applying with bad debts. Your lender may want to review the circumstances leading to your financial distress and compare them with your present financial situation.
In its most basic explanation, they will only offer you the loan if they think you can meet repayments.
Do Non-Conforming Loans Have Higher Interest Rates?
Yes, non-conforming home loans do come at a higher interest rate. This allows the non-conforming lender to compensate for their risk when offering you a home loan.
Many non-conforming lenders raise funds using debentures from potential investors. This means that the interest you’re paying helps these lenders to make a return for their investors.
Then again, the rates may vary even with a non-conforming loan category. The price difference depends on the loan application quality and details.
For example, if a home buyer with a bad credit history takes a non-conforming loan, they may be charged approximately 1% – 5% more than a normal loan.
On the other hand, suppose a home buyer taking a non-conforming loan has a good income. In that case, it may help lessen the gap between it and a traditional home loan. The rate is usually around 0.1% – 0.5%, only more than a standard loan.
Conforming vs Non-Conforming Loan
The differences between a conforming and non-conforming loan can be summarised based on the following factors:
1. Credit Provider
Conforming loans come from mainstream banks or major lenders. They are based on standard banking rules and criteria.
In contrast, a non-conforming home loan is typically found with smaller lenders. These lenders assess borrowers’ applications on alternative criteria.
2. Eligibility
People can access conforming loans if they have regular jobs, a good credit history and can provide proof of income with financial statements, PAYG statements or frequent pay slips.
Meanwhile, a non-conforming borrower may have a tax debt, poor credit history or are casually employed. Likewise, suppose you’re a contract worker or recently started a business and paid a salary derived from business income. In that case, you may have to connect with non-conforming lenders to get a loan.
3. Documentation
You would usually need to submit your proof of identification, birth certificate, tax returns, recent payslips and financial statements for a conforming loan.
Most non-conforming lenders require your business bank statements, tax returns, borrower’s Business Activity Statements (BAS) and a letter from your accountant. In addition, you would need to supply your identity documents and a birth certificate to prove your identity.
4. Costs
For a non-conforming home loan, home buyers often have to pay higher interest rates than those charged by the lender would charge. Over and above, the upfront fees can also be higher.
For one thing, a conforming loan implies lower monthly home loan repayments and more savings over the life of the loan.
Another critical factor you should keep in mind is the exit fees applicable on non-conforming loans can be rather hefty if you repay the loan within the first 3 - 4 years. These extra expenses help lenders have some buffer against the additional risks associated with non-conforming home loans.
Our range of mortgage calculators can help you get an estimate of what your repayments might look like. This would give you an idea of how much you might need to budget.
Who Are Non-Conforming Home Loans For?
Home buyers typically suited for non-conforming loans are those with the following financial situations:
Lack a Perfect Credit History
If you need a bad credit home loan and require more flexible credit options, have previously declared bankruptcy, or missed payments of your loans or bills in the past, you may have a low credit score.
It may also be that you’re new to Australia and have to establish a credit score.
Weak Savings Record
Some home buyers do not qualify for normal loans despite a solid income, as they cannot put in the required deposit.
Nature of Employment
If you are self-employed, an independent contract worker, and/or regularly change jobs due to the nature of the industry; you may fail to secure a loan. This is because, being unable to show recent pay slips, a traditional lender views your employment as unstable.
Even if you’ve recently started your own business or a new job, you might not have a long enough employment history to qualify for a loan.
Have Multiple Debts
Some lenders may not be willing to give you a home loan if you have outstanding debts such as personal loans, business debts, credit card debts, etc.
Who are Non-Conforming Lenders in Australia?
Many non-conforming lenders are privately owned businesses. Some are even listed on the stock exchange in Australia or overseas.
Unlike the big banks and traditional lenders, these lenders are willing to offer loans with lending criteria more suited to your non-conforming personal circumstances.
What is the Difference Between Non-Conforming and Low Doc Loans?
Home buyers can choose between a non-conforming loan and a low doc loan. Knowing the difference between the two types of loans can help you choose the right one for your needs.
Low-Doc Home Loan
A low documentation home loan is pitched to home buyers with a good credit report but cannot supply the traditional paperwork lenders proof of income, regular pay slips, etc.
For example, you’re a contract worker with fluctuations in your income. Or, you’ve recently opened a business but have not yet completed your first tax return. In that case, you don’t have evidence of your most recent income.
Since you have a clean credit history, the lender may want to see other documentation such as a letter from your accountant, last year’s (BAS), etc.
Non-Conforming Home Loans
On the other hand, a non-conforming home loan may be a suitable pathway for a broader range of potential borrowers who do not match the typical loan criteria, for example, those with a bad credit score.
Benefits of Non-Conforming Loans
Overlook Bad Credit Rating
If you’ve had a few financial hiccups that resulted in a low credit rating, you can still qualify for this type of loan.
Alternative Documentation
If you’re self-employed or earn income from investments, you may find it challenging to provide the required payslips and tax returns that banks typically ask for. In such cases, non-conforming lenders are more flexible and can offer loans based on alternative documentation.
Pathway to a Conforming Loan
Non-conforming loans not only allow you to access a suitable home loan. They also enable you to re-establish your credit file and improve your poor credit history. Moreover, you can eventually move to a conforming loan in future.
Option to Refinance
Once you’ve addressed your credit impairments and set good credit history, you may be able to negotiate with your credit provider for a lower rate or refinance with a new lender altogether.
Limitations/Risks of Non-Conforming Loans
High Deposit
A few non-conforming lenders may be willing to lend up to 97% LVR on a residential loan. However, the majority will require a larger deposit than the typical traditional loan requirement.
Moreover, where your LVR is above 80%, you will most likely have to pay mortgage insurance, which will increase the overall cost of your loan by a few hefty thousands.
Higher Interest Rate
This is one of the critical downsides of non-conforming loans. Because the lender considers them a higher risk, you may have to pay a higher interest rate on your loan.
Lesser Flexibility
Depending on your lender, you may also find stricter repayment conditions, including shorter loan terms than what is typically offered for a traditional home loan.
Difficulty in Refinancing
A substantial proportion of the value of non-conforming loans involves refinancing for debt consolidation. However, it can sometimes be difficult to refinance a non-conforming loan, so it’s essential to do your research before committing to one.
Is a Non-Conforming Loan Bad?
Firstly, it’s essential to understand that non-conforming loans are not ‘bad’. On the contrary, they provide an opportunity for people who may not fit the traditional lending criteria of mainstream lenders, including banks, to still purchase a home.
In Australia, these lenders are not authorised deposit-taking institutions. For this reason, they are not regulated by the Australian Prudential Regulation Authority (APRA).
How Joust Can Help Your Home Loan Situation
Non-conforming loans can be tricky to shop for. But with the Joust online marketplace, you can access suitable non-conforming loans or low-doc loans.
Instead of crawling through websites, lenders you can trust will bid for your home loan. Even better, this service is free, and you are under no obligation to proceed.
