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What is a non-conforming home 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 per cent 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. They can be accessed by individuals with poor credit scores or those who don’t meet the minimum deposit requirement. People nearing retirement or those who recently started working may also be able to apply for a non-conforming home loan.
Of course, 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.
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 per cent deposit to be eligible for one.
Disclaimer
This article is over two years old, last updated on September 19, 2022. While RateCity makes best efforts to update every important article regularly, the information in this piece may not be as relevant as it once was. Alternatively, please consider checking recent home loans articles.
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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