What is a non-conforming home loan?

NICOLA FIELD
Personal Finance Writer · 30 September 2021
Most home loan lenders have strict criteria around who is eligible for a home loan. If you don’t tick all the usual boxes, the solution to buying a home could lie with a non-conforming home loan, but it’s important to be aware of the potential risks involved.
Non-conforming home loan
Credit: Radu Bercan (Shutterstock.com)

In may situations, being unique and individual is a big plus, but standing out from the crowd can be an issue when it comes to landing a home loan. If you don’t meet the standard home loan criteria set by most mainstream banks and lenders in Australia, there may still be options available to access the property market. One such possibility could be a non-conforming home loan, but it’s worth being aware of how they work and the potential costs and risks involved before committing to one.

What is a non-conforming home loan?

A non-conforming home loan is a loan offered to borrowers who don’t meet the typical lending criteria set out by banks and other major lenders. For example, they could be of interest if you have a poor credit record, a past track record of bankruptcy, or difficulty proving your income because you’re self-employed.

If that sounds like you, you’re certainly not alone. According to specialist lender Non Conforming Loans, an estimated one in five people may need a non-conforming loan because they can’t get credit from a traditional lender.

How do non-conforming home loans work?

In many ways, non-conforming home loans work much the same as a standard home loan in that they require prospective borrowers to apply to a lender, and that they can be offered on a variable, fixed or split rate. Depending on the loan and lender, you may also be able to pick and choose different features such as an offset account, a redraw facility or the flexibility to make extra repayments.

The main difference between a non-conforming and a standard home loan tends to be the cost. With a non-conforming home loan, you may often be asked to pay a higher interest rate than a traditional lender would charge. The upfront fees can also be higher, and the loan can come with high ongoing and exit fees. These additional costs compensate lenders for the extra risk they take on when offering non-conforming home loans.

On the plus side, if you take out a non-conforming loan and maintain your repayments over time, you can steadily improve your credit rating, which could mean you’re able to refinance to a lower rate home loan further down the track. It’s important to read the lender’s Key Facts Sheet or other documentation for any home loan you’re considering, to ensure you’re aware of any restrictions or additional costs around refinancing.

Who are non-conforming home loans suitable for?

A non-conforming home loan may interest people in a variety of circumstances, depending on the lender and home loan chosen. In general, non-conforming home loans could potentially be suitable if you:

  • Have a poor credit history – this may include a record of late payments, previously declared bankruptcy, or a history of defaulting on loans
  • Are self-employed and unable to show proof of income
  • Earn unstable or irregular income, which could be the case if you work on a casual or contract basis
  • Have a tax debt
  • Have been refused credit in the past.

Bear in mind that a home loan of any sort, including a non-conforming loan, is a significant financial commitment. You may risk losing your home if you fail to keep up with your loan repayments. Therefore, if you have a poor credit history or have recently experienced bankruptcy, it may be worth thinking carefully about whether now is the right time to apply, or whether you may be better off saving your money until you are more confident you’ll be able to manage a home loan financially.

What to weigh up with non-conforming home loans

Before applying for a non-conforming home loan, look at the fees and interest rates on offer. As we’ve mentioned, they can be significantly higher than most traditional home loans – and how much you pay may be decided on a case-by-case basis. Also look at whether there are any limitations or costs associated with paying off the loan early or refinancing it to a cheaper rate.

If you do decide to apply for a non-conforming home loan, be sure to be transparent and provide your potential lender with the full details of your financial situation, so they can find a loan which suits your needs and requirements. Importantly, think about whether you are in a strong enough financial position to pay off a home loan.

What is the difference between a non-conforming home loan and a low-doc home loan?

A low-documentation home loan (low-doc loan), is one designed for people who are unable to provide much of the standard paperwork lenders like to see around proof of income, such as regular pay slips. For example, maybe you’ve recently started your own business and haven’t had to complete your first tax return yet, so you don’t have evidence of your most recent income. Or you could be a freelancer with an uneven flow of income from month to month.

Unlike non-conforming home loans, low-doc loans are generally only available to people who have a clean credit history, and instead of pay slips, the lender may want to see other types of evidence such as a supporting letter from your accountant, recent bank statements and possibly your last year’s Business Activity Statement (BAS).

Non-conforming loans, on the other hand, could be accessible to a wider range of people who do not conform to typical loan criteria, including those with poor credit history.

The key with both options is to compare the different loans you are eligible for before making any commitments.


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This content was reviewed by Sub Editor Tom Letts as part of our fact-checking process.


Nicola is a personal finance writer with nearly two decades of industry experience. A former chartered accountant, who holds a Bachelor of Commerce and a Master of Education degree, Nicola has contributed to several popular magazines including the Australian Women’s Weekly, Money and Real Living.

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