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What is a non-conforming home loan?
Key highlights
Not all borrowers meet the standard lending criteria required for traditional home loans. A non-conforming home loan is designed for individuals who may have a low credit score, irregular income, or a smaller deposit. While these loans provide opportunities for those who might otherwise struggle to secure financing, they often come with higher interest ratesandadditional lender requirements.
Who may need a non-conforming loan?
A non-conforming home loan is offered to borrowers who don’t meet the standard lending criteria for funding. When a lender assesses your home loan application, they want to make sure you’ll be able to repay the mortgage.
To minimise their risk, each lender has minimum eligibility criteria that you must fulfil to qualify for a home loan. Some of the standard requirements may include a deposit covering at least 20% of the property price, a credit score of 700 or higher, and stable employment history.
If you don’t fit their minimum criteria, some lenders may perceive you as risky business and avoid lending money to you. However, not all lenders use the same yardstick to judge your repayment capacity. You may still find yourself eligible for a home loan with some lenders, despite not meeting the standard lending criteria, provided you can demonstrate your ability to service the mortgage.
Such loans are also known as non-conforming home loans. These loans cater to borrowers who do not meet the eligibility criteria for traditional home loans. This may include:
- Individuals with poor credit scores or past financial distress.
- Self-employed individuals without payslips.
- Those who don’t meet the minimum deposit requirement.
- People with irregular employment or contract-based work.
- Borrowers nearing retirement who may not meet long-term repayment criteria.
Unlike traditional lenders, some financial institutions assess these borrowers on a case-by-case basis rather than using strict cut-off points for credit scores and income stability.
Do non-conforming home loans offer guaranteed approval?
No, it is unlikely that you’ll find a credit product with guaranteed approval. Non-conforming loans can be accessed by individuals who may not meet the lending criteria of traditional borrowers. However, not every borrower with a bad credit history or a low deposit gets approved for a non-conforming home loan. As non-conforming borrowers are generally considered high risk, they are approved for a mortgage on a case-by-case basis.
The law requires a lender to ensure they don’t advance you a loan you cannot afford to repay. Therefore, a non-conforming lender will only approve your application if they are convinced about your financial health and repayment capacity.
If you are applying with bad debt, the lender may want to find out about the circumstances that led to your financial distress and how your situation has changed. So even though a non-conforming lender works with non-standard borrowers, it doesn’t mean they’ll approve your application if you are unemployed or delay your bill payments regularly.
Can self-employed borrowers access non-conforming home loans?
A low-doc home loan is also a type of non-conforming loan used by self-employed individuals, contract workers, and freelancers to qualify for a home loan without any payslips to prove their income. However, low-doc loans are only offered to individuals with a clean credit rating. You’ll also likely need a minimum 20% deposit to be eligible for one.
How do non-conforming home loans work?
The general structure and features of a non-conforming loan are similar to a traditional loan. The main point of differentiation is the higher interest rate to compensate the lender for their risk when offering a non-conforming loan. The entry and exit fee may also be higher to compensate for the lender’s risk.
However, you don’t have to be stuck with a high interest rate throughout your mortgage term. It’s generally possible to refinance to a lower rate once your situation changes and you become eligible for a traditional home loan. For instance, if you took out a bad credit home loan, making your repayments in a timely manner may help you improve your credit score and ability to refinance with a traditional lender a few years down the road.
On the other hand, biting off more than you can chew (or borrowing more than you can afford to repay) may worsen your financial health. Especially if you had financial difficulties in the past, it’s advisable to be extra cautious and only take out a home loan if you are sure you can afford to repay it.
You could use a repayment calculator to figure out your monthly repayments and see how they fit into your household budget. It may also help to speak with a mortgage broker to know your options and find out whether you are eligible for a non-conforming home loan. Just make sure you’re transparent and honestly disclose your financial situation so they can help you find a loan that matches your requirements.
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Product database updated 03 Mar, 2025
