If you’ve ever wondered ‘what is a non-conforming loan?’ but were afraid to ask, you can stop wondering. Simply put, non-conforming loans are for people and enterprises who do not meet the standard lending criteria of major lenders, such as banks.
Read on to find out everything you need to know about non-conforming loans, including if they could be a good option for your finance needs.
Who are non-conforming loans for?
Applying for a non-conforming loan is likely to be a worthwhile option for you if you:
- are self-employed.
- have a consistent income, but can’t provide a significant deposit.
- want to refinance multiple debts into a single debt consolidation loan to make your finances easier to manage.
- have previously been declared bankrupt.
- have missed (or been late with) debt repayments in the past.
- regularly change jobs due to the type of industry you work in (or if you generally have low job stability).
- recently started a new job or business.
- are nearing retirement.
- have tax debts.
- have made a lot of unsuccessful loan applications.
- are a new Australian resident.
- want to borrow a high LVR – above 90% – 100%.
- have an illness or disability that affects your ability to work.
It’s important to understand that any failed loan applications you make will damage your credit rating further. However, not including DFS. Apply here.
What is the difference between conforming and non-conforming home loans?
Unlike non-conforming loans, conforming loans do meet the standard lending criteria of major lenders. Those criteria can include the following:
- The applicant having a stable and secure income.
This requirement can prevent bank loan approvals for self-employed applicants, or those who have recently changed jobs, or who regularly change jobs.
- The applicant having a good credit history (also known as a credit score or credit rating).
This requirement can prevent applicants with a bad credit history (or no credit history) from being approved for a bank loan.
- The applicant not having a significant amount of other debt.
This requirement can prevent applicants with other debts being approved for a bank loan to consolidate all their debts. Those other debts could include credit cards, personal loans, business loans and/or tax debts to the Australian Taxation Office (ATO).
It’s important to understand that if your loan application is assessed by a major lender (like a bank) as being non-conforming, it will almost certainly be declined. However, you do have the option of applying to a non-bank private lender for approval instead.
What makes a loan non-conforming?
Non-conforming loans with a private lender can have any (or all) of the following characteristics. They can:
- have a high LVR (loan to value ratio).
- be for self-employed applicants (or those with less stable or secure incomes).
- be approved for applicants with bad (or no) credit history.
- be utilized by applicants with significant amounts of other debt, especially if those applicants can provide collateral security to the lender (such as property) to reduce the lender’s risk. This is known as a debt consolidation loan.
Private lenders can provide these non-conforming loans with flexible terms and conditions that are suited to the applicant’s individual requirements.
Why get a non-conforming loan?
A non-conforming loan may be your only finance option if you don’t satisfy the strict lending criteria of major lenders. Two major developments have led to many Australian lenders recently tightening their lending criteria.
1) The impact of COVID-19 on the Australian economy.
For example, Westpac has lowered their LVR for self-employed applicants and those living in areas affected by the downturn in tourism. This means that borrowers need to come up with a higher deposit to be approved.
2) The Financial Services Royal Commission.
This inquiry highlighted some unethical bank lending practices in Australia, which led to major lenders implementing stricter approval criteria.
Both of these factors make an increasing number of bank finance applications becoming non-conforming and to an increase in private lending activity in Australia.
Is there a non-conforming loan limit?
How much you can borrow for a non-conforming loan with a private lender largely depends on the amount of collateral security you can provide. Different private lenders will also have different loan amounts that they are prepared to provide in return.
The compatibility of a private lender and a borrower depends on their respective needs. The finance broking service we provide at DFS helps to match our non-conforming loan applicants with a suitable private lender from our panel of over 200 across Australia.
What are the pros and cons of non-conforming loans?
✅ The lender will usually assess your loan application on its merits, rather than placing too much emphasis on standard lending criteria (like your credit rating or your type of employment).
✅ Getting a non-conforming loan can help you to capitalise on opportunities that you may otherwise miss out on due to your conforming loan application being declined.
✅ You can be approved for a non-conforming loan faster and with less documentation than you would need to provide for a conforming loan.
❌ They typically have a higher interest rate to compensate the lender for the higher risk. However, this risk can be reduced if you can provide appropriate collateral security like property.
❌ They may have higher associated fees and charges than a conforming loan. However, this isn’t necessarily the case.
What is a low-doc loan and how is it different from a non-conforming loan?
As the name suggests, a ‘low-doc’ loan is one that is provided to applicants with minimal documentation. In that sense, low-doc loans are similar to non-conforming loans. Both can be approved with a lower level of documentation than you would need for a conforming loan with a major lender.
However, low-doc loans and non-conforming loans also differ in a number of ways.
1) Low-doc lenders typically require more documentation than non-conforming lenders.
Since the introduction of the National Credit Code, low-doc lending has become more regulated. Low-doc lenders are now asking for more applicant information, such as requiring the business activity statements (BAS) and recent tax returns of self-employed applicants.
Non-conforming loans are not subject to the National Credit Code regulations. Instead, they are individual contractual arrangements between the private lender and the borrower. The contract protects the legal rights of both parties. Each party should get independent legal advice on the contract’s terms and conditions before signing. This helps to ensure mutual understanding of the contractual arrangement.
2) Low-doc loans are usually only provided to applicants with a good credit history. Non-conforming loans on the other hand can be approved for applicants with a bad (or no) credit history. If you are in either of those situations, your chances of approval will increase if you can provide appropriate collateral security.
3) Low-doc loans typically require applicants to provide a higher deposit.
In other words, low-doc loan providers usually have a lower maximum LVR that they will be prepared to approve than a private lender may have. A higher maximum LVR from a private lender means you need less deposit.
All of these differences mean that non-conforming loans can be approved for a wider variety of applicants than low-doc loans can.
Other non-conforming loan FAQs
Q: Are non-conforming loans legal?
A: Yes. All of the contractual terms and conditions in a non-conforming loan arrangement are legally enforceable.
Q: Is private lending legal in Australia?
A: Yes. In fact, a 2018 report by PricewaterhouseCoopers found that it was the fastest-growing sector of the Australian lending market, with more than one in four loans now being provided by private lenders.
Q: How do non-conforming loans work?
A: Once they are approved, non-conforming loans work in much the same way as conforming loans. Borrowers and lenders must adhere to the terms and conditions set out in the loan contract, including repayment schedules and interest charges.
Q: How do I know if am a non-conforming loan applicant with a major lender?
A: You have probably never heard of the term ‘non-conforming’ when dealing with a major lender. But if your application for a loan with a bank or other financial institution is declined, then you are a non-conforming applicant from their perspective. That’s because you don’t meet all of their loan approval criteria.
If you are (or have ever been) in that ‘non-conforming’ position, then applying for a private loan is an option worth considering because you may have a better chance of the finance that you need being approved.