2/20/2018

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Unconventional Lending

There isn’t a lot of information out there on what exactly unconventional mortgages are. Many lenders purport to offer this type of financing, but most of them are just lumping these types of loans in with their other loan programs. They certainly don’t explain what an unconventional loan is, and rarely do they specialize in this unconventional financing.

So, what is an unconventional mortgage loan? In order to understand that, it would be best to know what a conventional mortgage is first. A loan typically has two fundamental components: an interest rate and a time period. When these two variables are known at the outset, and will not change for the duration of the loan, they are said to be “fixed.”

Thus, a loan with a fixed interest rate and a fixed period of time is a conventional loan. By contrast, an unconventional loan will have a varying rate of some sort. You will want to talk with someone who specializes in unconventional mortgages if you have the type of credit profile that may require some lending flexibility.

Who Might Be Interested in an Unconventional Mortgage?

Unconventional mortgage loans offer alternative financing opportunities for those who have credit profiles that do not yield a high enough credit score to secure a conventional loan. These people may have immense earning power, and even a long, well-developed credit history.

However, for some reason, their situation does not translate as well to paper, or it just doesn’t at that particular moment in time. Market forces, such as the current subprime mortgage crisis, may have also caused lenders to tighten up lending standards and reduced the overall availability of financing. Potential borrowers in this situation may have to consider an unconventional mortgage which offers creative financing.

Examples of Unconventional Mortgage Loans

We still haven’t discussed exactly what type of loan qualifies as an unconventional mortgage. The first component of a conventional loan that we mentioned above was the interest rate; typically loans will have a fixed interest rate that will not change throughout the life of the loan. This interest rate is decided upon at the time of origination, and is based on various market forces as well as the borrower’s credit and collateral.

An unconventional mortgage will often not have a fixed interest rate. Such loans are known as Adjustable Rate Mortgages, or ARMs.

Another type of unconventional mortgage loan is an Interest-Only Mortgage. Normally, one’s payment is used to pay the interest that has accrued each month, but some portion of the payment also goes towards paying down the principle.

With an interest-only mortgage, only the accrued interest is paid, allowing a reduction in the monthly payment (but leaving a large amount principle to pay down when the loan period expires).

Jumbo loans, also known as non-conforming loans, are another category. These unconventional mortgages can be given to those who cannot achieve the typical credit minimums, as we discussed before. They may also be necessary due to an atypical use for the funds, or the type of collateral offered to back the financing.

Another type of unconventional mortgage loan is a negative amortization loan (NegAm). With a negative amortization loan, your payment will not cover the total interest accrued each month. The remaining interest amount will then be added to the principle. Thus, you will actually be increasing the total amount of the loan that must eventually be paid off.

Generally, all these types of unconventional loans are considered high-risk by lenders. As such, they tend to be accompanied by an interest rate which is higher than average.

Unconventional mortgages are rarely a borrower’s or a lender’s first choice. These types of loans are entered into when most other options are unavailable, or the borrower simply cannot meet the lending criteria for the property that he or she would like to purchase.

 

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