The lending criteria for home loans in Australia are fairly strict. Mortgage lenders generally prefer giving loans to people who show that they have the ability to service their loans properly. That means those with a steady income and employment, good credit history and savings habits are usually given preference when applying for home loans.
But what about people who are self-employed, have the tendency to change jobs frequently, have a history of not paying bills on time or have not been able to save enough for a home deposit? Can they still get home loans? They sure can, through non-conforming home loans, which typically come with higher mortgage interest rates and other fees.
Here’s a rundown on three main non-conforming mortgage loans – low-doc, bad credit and no-deposit loans.
Low-Doc Home Loans
Low-doc home loans generally for Australian home buyers with difficulty showing their financial situations through documents such as pay slips, financial statements and tax returns. These will include those who are self-employed, earn more than half of their income through commissions and people with short employment histories.
When applying for a low-doc home loan, the borrower will need to fill out an income declaration form stating his income and assets through a self-verification process instead of providing proof of employment, pay slips and other financial statements.
As the risk is higher for the mortgage lender, the interest rates are higher for the borrower too. Another disadvantage is that borrowers can only borrow up to 80% of the value of the house and are required to take out mortgage insurance too. Low-doc loans are also only for people with a clean credit history.
Borrowers who make repayments on time and can provide adequate financial statements and tax returns after a period of time can request to have the home loan rate reverted to a standard variable or fixed rate loan with a lower interest rate.
Bad Credit Home Mortgage Loans
If a prospective home loan borrower has a bad credit history – he regularly missed debt repayments, has scores of unpaid loans or has been declared bankrupt – he is not likely to get a mainstream home loan. He can, however, apply for another type of non-conforming loan called a bad credit home mortgage loan or credit impaired loan.
The interest rates are often higher than standard home loans but the ability to pay off a bad credit home loan promptly is an effective way to rebuild a borrower’s creditworthiness as far as mainstream mortgage lenders are concerned. Be forewarned, though. Some non-conforming loan providers impose heavy early exit fees. Borrowers who want to switch from bad credit home loans to cheaper, standard loans after servicing their expensive loans religiously for several years may find themselves in a quandary if such heavy penalties apply.
No-Deposit Home Loans
Ideally, home buyers should have at least 20% of the property purchase price. But these days, many mortgage lenders are happy to give 100% loans, also known as no-deposit home loans, provided that borrowers can meet their strict lending criteria.
To qualify for a no-deposit loan, the borrower must show that he has a steady income (for example a stable, permanent job), pay for mortgage insurance which can be approximately 2.5% of the loan amount and demonstrate the ability to service the loan properly. And of course, be prepared to fork out for much higher mortgage interest rates too.
Non-conforming home loans are for home buyers who don’t meet the standard lending criteria of mainstream mortgage loans or who have been rejected by traditional lenders. These include low-doc loans for creditworthy borrowers unable to provide full financial documentation, bad credit home mortgage loans for those with poor credit history and no-deposit home loans for those with a very small or no home deposit at all.