Explaining 'Non Conforming Loans'

Friday, December 12, 2014

A non conforming loan is one that fails to meet the standard lending criteria of a bank or a main stream lender of funds.

Reasons include the loan amount is higher than the standard lending limit (for that type of loan), lack of adequate credit character (previous history of defaulting on loans, not paying back debts, bankruptcy, etc), the unorthodox nature of the use of the funds or the security securing the loan is not a standard one. A large portion of real estate loans are qualified as non conforming because either the borrower's financial status or the property type does not meet bank guidelines.

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The flexibility of private money can allow for a much wider range of deals to be funded, although more detailed and substantive collateral and documentation may be required by the lender of these funds.

Selecting a Non Conforming Lender should be the same way borrowers would find a standard broker or lender. Ask friends, family, associates or work colleagues for referrals of people or organisations they have used to obtain finance. Finding Brokers that are reputable have relevant industry qualifications, associations and offer testimonials are important as well. When you make contact with likely organisations, assess how quickly they respond to your requests, their level of customer focus and service and the size of the organisation you are dealing with is important as well - a 'one man band' is never a good idea! Finally, ensuring the broker you find has access to more than one non conforming lender and the person advising you is rewarded the same way - irrelevant of loan or lender they recommend to you. This will ensure their focus is on your benefit, rather than the highest commissions for non conforming lenders.

Types of non conforming loans

Non Conforming loans exist for Commercial purposes, not just residential or personal reasons. They can be used to fund residential developments, home, unit, townhouse and apartment developments, child minding centres, medical centres and high density developments. Most lending facilities are also catered for in the non conforming commercial lending market. These include commercial overdrafts, building, construction and development loans, progress and draw down type loans and term commercial loans.

Home Loans for non conforming purposes are now very common in Australia and very closely mirror the conforming markets. The loan purposes can be to purchase a first home, a new home, for investment purposes and now have extended for business purposes. Products like offset accounts, redraw facilities, interest only options, fixed rates and most other options also exist for non conforming home, business and investment loans. Low documentation, non conforming loans are finding prevalence in the market at the moment, with certain specialised non conforming lenders are offering a lending ration of 95% of the value of the property offered as security.

Non conforming personal, car and equipment finance is making an entry into the Australian lending market. Many of the larger lenders - both in the conforming and non conforming market have now ventured into this are due to the high levels of demand. Companies like GE, Liberty Financial, Bluestone, Pepper, EFS, etc. The terms of these loans are a stricter than the standard loans and the interest rates are a little bit higher to cater for the increased perceived risks, but overall, it's a similar product as the standard market. Companies like Westpac, ANZ, CBA, National, Esanda, CBFC and other mainstream banks offer the standard lending products but rarely venture into the non conforming markets.

The things to watch for are exorbitant fees and charges which may be masked through low interest rates. These fees can be brokerage fees, loan processing fees or unreasonable valuation fees. As a guide, you should not need to pay any brokerage fees for the broker to organise a loan for you as they will get paid from the lender directly. The valuation fees should not vary too much from a standard lenders fees - which is about $350 for a residential home.

Finally, the best advice I may provide is to only use brokers who have an association with one of your friends, family, business or work colleagues. Finding brokers or lenders randomly off the street is rarely a pleasant experience.

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