Non-conforming home loans guide

If you don't have a job with a PAYG salary, you've had some credit troubles or have no credit history at all then you might need a non-conforming home loan.

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For most Australians trying to buy property, a lender will expect a decent credit history and pay slips as proof of their income. But not every borrower can meet those expectations. This is where non-conforming home loans come in.

While non-conforming home loans have higher interest rates and are mostly offered through small, specialist lenders, they can be a lifesaver for the right type of borrower.

What is a non-conforming home loan?

A non-conforming home loan is a loan pitched at those who don't meet the typical home loan borrower criteria required by a big bank or major lender.

These loans typically come with a higher interest rate than a regular home loan, based on the perceived risk of lending. They may also come with more fees than a traditional home loan, so it's always worth looking closely at the repayment conditions for any hidden charges.

But in other respects a non-conforming home loan looks much like other home loans. These mortgages can have fixed or variable interest rates, as well as features such as redraw or split facilities and ability to make extra repayments.

What kind of borrowers need these loans?

A non-conforming home loan might suit someone with a less than stellar credit rating. This might mean you are:

  • New to Australia
  • Self-employed or a contract worker
  • Yet to apply for credit (and therefore have no credit history)
  • Retired
  • Someone who has missed repayments before or previously refused credit
  • Someone who has previously declared bankruptcy

How are non-conforming home loans different from low doc loans?

A low doc loan is aimed at self-employed people who can't provide the standard pay slips as proof of income. A low doc borrower can provide proof of their income using alternative documents, such as tax returns, business activity statements or a letter from their accountant.

Low doc does not mean the borrower has any credit issues. You still need a good credit history to get one. If you are a self-employed borrower who has had credit issues or does not have enough documentation to get a low doc loan, then you could look at non-conforming home loans.

A non-conforming loan is generally available to a larger set of individuals, including people with bad credit history. There are also bad credit home loans specifically for borrowers with recent credit troubles (these are a type of non-conforming loan).

Can a mortgage broker help me find a suitable loan?

Mortgage brokers can help any borrower navigate the many home loan options on the market. This includes non-conforming borrowers. Brokers have access to a panel of lenders and this panel typically includes some specialist lenders who offer low doc loans in addition to bad credit loans and other non-conforming home loans.

A broker can be especially helpful if you're not sure whether you can get a regular home loan or a non-conforming one. If you apply for an unsuitable loan you may get rejected and the rejection will show up on your credit report. Going via a broker lessens that chance, as the broker's job is to help match you to a product you're likely to qualify for.

Can I switch from a non-conforming home loan to a regular mortgage later?

It is possible to refinance your non-conforming loan if you meet certain eligibility. This could be dependent on the current loan to value ratio (LVR) and the amount of home equity you have.

Most lenders require at least 20% equity in your property, ensuring your LVR is under 80%.

It is also important to speak to your lender and enquire about any exit fees that could impact on your decision to refinance.

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