A short summary
Have you ever considered going outside of the traditional banking system for mortgage loans? If so, working with an unconventional mortgage lender could be your solution. Unconventional mortgage lenders offer more options to finance your real estate investment property. These lenders also provide a chance to get fast funding and get loan terms tailored to you.
For those who are wanting to get into the exciting world of real estate, traditional mortgage loans aren’t the only option. Mortgages typically come with strict lending criteria that ice many people out of the real estate game. Unconventional loans offer real estate investors a saving grace and a way to get the best loan for their strategy.
Wrapping your head around what an unconventional mortgage is, is the first step. From there, we’ll take a look at the benefits and drawbacks of unconventional loans, where to find them and if they’re the right financial solution for you.
What Is An Unconventional Mortgage?
Unconventional mortgages are a type of loan that has become increasingly popular in recent years. These loans often have less stringent lending criteria and offer more flexible repayment options than traditional mortgage loans. Under the unconventional mortgage umbrella there are two types of loans: non-conforming loans, which do not meet the requirements of traditional lenders, and alternative or niche loans, which provide specialized financing to borrowers with unique needs.
Unconventional or non-traditional mortgage loans can usually be identified by their flexible repayment terms, unconventional amortization schedule, higher interest rates and easier loan application criteria. These are often not conforming loans, and are usually provided by companies, home sellers and other private lenders.
One common example of an unconventional mortgage is an interest-only loan, which allows borrowers to defer repayment of the principal amount until later in the term of their loan. This can be especially helpful for people who need to keep their monthly payments low for a period of time. Other unconventional loan types include balloon loans, FHA loans, VA loans, crowdfunding, USDA loans, jumbo loans and more.
Conventional vs Unconventional Loans - What's The Difference?
Conventional or traditional loans are conforming loans that abide by the federal regulations, while unconventional loans are various types of loans that include non-conforming loans. Let’s take a look at the main differences between these loan types.
| Conventional | Unconventional |
|---|---|
| Offered by banks and other traditional financial institutions that provide mortgage lending. | Provided by companies, private lenders, home sellers and more. |
| Minimum credit score to qualify for a loan ranges between 620 and 640. | Minimum credit score required to qualify for a loan can be as little as 580 in some instances. |
| Repayment schedules for conventional loans follow a traditional amortization schedule. | Repayments don’t follow a typical amortization schedule and can be interest-only or balloon payments. |
| Conventional loans have fixed or variable interest rates and specific loan terms that are uniform across the board. | Loan terms are more flexible and allow for deferring payments or other options. |
| Qualification for conventional loans requires people to have good credit and provide their credit history with their application documents. | Unconventional loan requirements aren’t based on stellar credit scores and those who don’t qualify for traditional loans can apply for unconventional loans and get approved. |
| Down payments of at least 20% of the property’s purchase price will need to be made, so borrowers need to have this available. | Down payments for these loans vary from lender to lender, so borrowers can shop around for the one that requires the least, if they don’t have much capital upfront. Down payments on these loans can be lower than conventional loans. |
| Loan approval is based heavily on the individual’s personal financial history. | Loan approval is based on the potential success of the deal, and not on the borrower’s personal financial history. The property acts as a security for the loan. |
| Conventional loans meet the guidelines set out by Fannie Mae and Freddie Mac. | These loans don’t need to meet traditional lending criteria and include FHA loans, VA loans, balloon loans, interest-only loans, jumbo loans and more. |
Lender Type: Conventional loans come from banks and traditional institutions, while unconventional loans are offered by private lenders, companies, or even home sellers.
Credit Score: Conventional loans require a minimum credit score of 620–640, but unconventional loans may accept scores as low as 580.
Repayment Terms: Conventional loans follow traditional amortization schedules; unconventional loans may allow interest-only or balloon payments.
Interest Rates and Terms: Conventional loans have fixed or variable rates with uniform terms, while unconventional loans offer more flexible terms, including payment deferrals.
Credit Requirements: Conventional loans require good credit and a detailed credit history; unconventional loans focus less on credit and more on alternative approval criteria.
Down Payments: Conventional loans often need a 20% down payment, whereas unconventional loans may have lower or more flexible down payment requirements.
Approval Criteria: Conventional loans are based on personal financial history; unconventional loans consider the property’s potential value as collateral.
Loan Guidelines: Conventional loans follow Fannie Mae and Freddie Mac standards, while unconventional loans include diverse options like FHA, VA, balloon, and jumbo loans without standard guidelines.
List of Unconventional Mortgage Lenders
There are various ways to find unconventional mortgage lenders, so we’ve put together some of the places you can find them and some of the well-known lenders in the space.
Online lenders
A quick online search is an easy way to find lenders who offer unconventional loans. It’s also a convenient way to find reviews about each lender, to gauge whether others have had a positive experience with them. Online lenders usually after fast financing and sometimes loan approval in a matter of minutes.
New Silver are a hard money lender providing unconventional loans that don’t conform to the traditional criteria of financial institutions. Borrowers can get loans in as little as 5 days, with less stringent lending criteria and using the property as collateral. Rocket Mortgage is another example of an online lender that provides easy and convenient funding via their online platform.
Marketplaces
There are various online marketplaces that provide borrowers with a list of unconventional lenders to choose from. Zillow and LendingTree are two examples of these marketplaces. Both websites use the borrower’s information to determine which unconventional loans may suit their needs the best. Once a borrower has chosen the loan type and the lender that they feel is best, they can work directly with the lender.
Brokers
Brokers work almost like marketplaces, where a broker will connect borrowers and lenders by using the borrower’s requirements to determine which lenders may be suitable. In this situation, a broker will charge a fee for pairing a borrower with a lender. For real estate investors this can be a convenient way to find reliable lenders who provide unconventional loans as their mortgage lending offering.
Small lenders
Now that banks are not necessarily the best solution for many borrowers, those who have credit scores that are below average have other alternatives. Small lenders often provide unconventional loans based on an investor’s property deal, by using the property as collateral. These loans are less focused on the borrower’s personal financial situation, which means they’re easier to get approval for. Lenders like Better.com and PennyMac come highly recommended by NerdWallet for refinancing and FHA loans respectively.
Credit unions
Credit unions aren’t subject to the same federal regulations as banks and can therefore offer borrowers flexible loan terms that don’t necessarily conform to the regulations. This means that non-bank lenders can offer loans to those who have lower credit scores, or who don’t qualify for bank loans.
Advantages of Unconventional Loans
Unconventional loans provide many real estate investors with the opportunity to break into the real estate game, even if they can’t get approved for a traditional loan.
- Flexible loan terms: Investors can get loan terms to suit their unique needs for each deal. In other words, a fix and flip deal may be better suited to an interest-only loan, where investors can purchase the property and upgrade it while only paying the interest on the loan, then make a balloon payment once the property is sold for a profit.
- Make money before paying off the loan: Being able to pay only the interest on a loan and not have to stick to a strict amortization schedule allows investors to generate profit on an investment property before paying off the loan.
- Easier to qualify: Unconventional loans are easier to qualify for, which is great news for new real estate investors, or those who don’t have stellar credit. Getting approval is based more on the property deal than on the borrower’s personal financial situation.
- Variety of options: Unconventional loans come in many different packages, offering investors the chance to pick the one that suits their needs the best. From short-term to long-term, with varying interest rates and payment schedules.
- Lower monthly payments: Interest-only options, amongst others offer borrowers lower monthly payments which can be adjusted to suit their requirements.
Disadvantages of Unconventional Loans
While unconventional loans provide a good financing alternative for many lenders, they also have some drawbacks to be aware of.
- Interest rates can be higher: Some unconventional loans have higher interest rates than traditional loans. For example, ARMs can increase the interest rate during the repayment period. This is also to make up for the lower credit score requirements and higher importance placed on the deal itself instead of the borrower’s finances.
- Risk of defaulting can be higher: Being able to defer payments is all well and good until the principal amount is looming and the monthly repayments go up, so the borrower can no longer afford it. There’s something to be said for having set monthly payments and being able to budget for this, and flexible loan terms can increase the chances of borrowers defaulting.
- Equity isn’t built as fast: Flexible loan terms and interest-only options are great for lowering monthly repayments however investors aren’t building equity in the property during that period of time.
Final Thoughts - Should You Use An Unconventional Mortgage Lender?
According to NerdWallet, almost 50% of all home loans are now provided by non-traditional lenders. These include hard money lenders, private lenders, marketplaces and more, with loans such as jumbo loans, interest-only loans, VA loans and so on. Unconventional mortgage lenders can be a great option when you need access to mortgage loans but don’t fit the traditional mold.
If you’re self-employed, don’t have stellar credit, or just want a more personalized experience, an unconventional lender may be right for you. Keep in mind that they do charge a bit more in fees and interest rates, so make sure you crunch the numbers to see if it’s worth it and fits into your investing strategy.
Frequently Asked Questions (FAQ)
Options for Borrowers with Past Credit Issues
If you’ve faced credit challenges such as bankruptcy or foreclosure, there are still pathways to securing a loan. Here’s what you need to know:
Bankruptcy Recovery
To be eligible for a loan post-bankruptcy, borrowers generally need to ensure that their bankruptcy has been either discharged or dismissed for a period of at least two years before submitting a new application. This waiting period is designed to demonstrate financial stability and recovery.
Post-Foreclosure Eligibility
For those who have experienced a foreclosure, loan modifications, short sales, or deeds-in-lieu, or have dealt with mortgage delinquencies of 120 days or more, a similar two-year period is necessary. These credit events must be resolved at least 24 months prior to applying for a new loan.
Exploring Loan Programs
Several loan programs may be more lenient towards past credit events. Here are some popular options:
- FHA Loans: Backed by the Federal Housing Administration, these loans often have more flexible credit requirements.
- VA Loans: Available to veterans and active-duty service members, these loans offer favorable terms and don’t always require a perfect credit history.
- USDA Loans: Designed for rural and suburban homebuyers, these loans might provide an opportunity even with past credit blemishes.
It’s important to work closely with a loan officer or financial advisor who can guide you through these options and help identify the best pathway based on your specific circumstances.
Securing a mortgage as a self-employed individual might feel like navigating uncharted waters. Fortunately, there are ways to qualify without a traditional W-2 form, making homeownership within reach for independent professionals.
1. Leverage Bank Statements:
- Provide Proof of Income: Instead of relying on tax returns alone, lenders often allow self-employed applicants to use bank statements as evidence of consistent cash flow.
- Demonstrate Stability: By showcasing regular deposits, you can give lenders confidence in your ability to meet mortgage obligations.
2. Opt for Alternative Documentation Loans:
- Flexible Requirements: Some lenders offer loan programs specifically designed for self-employed borrowers. These programs take into account various forms of income documentation beyond W-2s, such as 1099 forms, profit and loss statements, and business contracts.
- Customized Solutions: These loans often feature terms that cater to unique income structures, supporting non-traditional career paths.
3. Highlight a Strong Credit Profile:
- Credit Score Matters: A solid credit score can bolster your application, showcasing your reliability in managing debt and financial commitments.
- Show Debt Management: Demonstrate your ability to handle both personal and business-related debts effectively.
4. Prepare a Robust Financial Portfolio:
- Assets and Savings: Highlight savings, investments, and any assets that may reassure the lender of your financial security.
- Business Health: Present comprehensive records of your business’s financial health to illustrate sustainability.
By exploring these options, self-employed individuals can map out a path to homeownership that doesn’t depend solely on traditional employment verification. Emphasizing alternative documentation and strong financial health opens doors to flexible lending opportunities.
Understanding Mortgage Insurance and Its Importance
Mortgage insurance is a safeguard for lenders when providing loans to homebuyers. It’s a policy that kicks in if a borrower fails to make their mortgage payments.
Why Mortgage Insurance is Necessary
Risk Mitigation: Lenders face significant financial risks when offering loans. Mortgage insurance helps mitigate these risks by providing a safety net, ensuring lenders can recoup their funds if borrowers default.
Enabling Homeownership: For many potential homeowners, saving up a substantial down payment is a hurdle. Mortgage insurance allows these individuals to secure a loan with a smaller down payment, making homeownership more accessible.
Stability for Lenders: In unpredictable financial climates, lenders require assurance. Mortgage insurance provides this stability, allowing lenders to continue offering loans without fearing substantial losses.
Mortgage insurance ultimately acts as a financial buffer, supporting both lenders’ stability and borrowers’ access to homeownership.
