Non Conforming Loan and a Bank Loan
A conforming loan / Bank Loan is a loan which comes from a mainstream bank (like NAB, Westpac, Commbank or ANZ) or a prime lender which is based on standard banking rules and criteria. People who have a regular job, clean credit and can have their income validated via PAYG statements and payslips usually apply for conforming loans.
For a Bank / Prime mortgage, you’ll generally need a minimum credit score of 650. Your credit score represents your ability to repay a loan on time and as for in Australia, your scores will be somewhere on the scale between Zero and 1,000 or 1,200. Zero means poor, 1,000, or 1,200 (also known as perfect score) means excellent.
Generally, a conforming loan requires the following documents:
– proof of identification
– birth certificate
– personal bank statements
– tax returns
– a couple of recent payslips
The application process is fairly standard and depending on the complexity of the application should only take a couple of days to be approved, although at times may vary lender to lender. It also depends on how well the borrower is at complying with the documentation requests.
Generally the process continues as follows, the borrower and lender agree on a fixed or variable mortgage and agrees on a specific product, the paperwork is submitted and then assessed, the loan is approved, and then from there the mortgage paperwork is signed, and the borrower can then go ahead and make their purchase with the funds that they receive.
What is a non conforming loan?
A non conforming home loan is a loan that can generally be found with smaller lenders, which assesses customers based on an alternative set of criteria.
Generally, people who may have a bad credit score or some paid or unpaid defaults require a Bad Credit Home Loan and those that have a small business or work as an independent contractor apply for a Low Doc Home Loan in Australia.
The loans often require just as much paperwork as a conforming loan, but just require alternative paperwork. Documentation provided includes; business bank statements, tax returns, BAS statements and a letter from their Accountant plus any relevant identity documents and a birth certificate to confirm identity.
The process begins with a quotation process, and once a quote has been formalised moves onto a conditional approval. To get a conditional approval, the borrow needs to comply with all the documentation requirements and be able to verify their business income. The next step is the approval and finalisation of the loan, based on the fact that the borrow provides all the necessary paperwork in a timely manner.
They then can move onto the signing of the documents and then the borrower can take possession of the funds and then make payment towards a home and/or land.
What is the difference between a Conforming Loan and a Non Conforming Loan?
A conforming loan is a loan that conforms to the standard banking criteria and is considered a standard loan rather than an alternative non-conforming loan. Whereas non-conforming loans are basically loans from non conforming lenders which provide alternative criteria for the loans to be assessed.
They are very similar in that they achieve the same outcome. However, they are different because they provide different solutions to two sets of people. On one side is the regular worker who can verify their income easily and have no problems with credit, and on the other side is the small business owner who requires more flexibility and may have some problems with their credit.
The main difference is that those that apply for conforming loans can verify their income via payslips and bank statements and have a regular income from being employed. Whereas those that apply for non-conforming loans are self-employed, independent contractors or small business owners who are paid a salary which is derived from business income. To verify their income, they must gather various documents to make up for the fact that they don’t have a regular job, so they have to prove their income with a set of different documents.
So which is better, conforming or non-conforming?
Someone who works in the government on a full time basis for the last 5 years with no real problems with credit would apply for a conforming loan, especially if his credit rating was quite high. However, a restaurant owner whose income was varied throughout the past 5 years and has had some trouble paying a phone bill in the past may benefit from a non-conforming loan, which is way more flexible then a conforming loan.
Often there is a difference between interest rates and deposits, there may be a higher deposit for a non-conforming loans, both applicants would be required to come up with a deposit. As for interest rates, they might only be higher for a fixed rate mortgage as opposed to a variable rate for a conforming loan. For a non-conforming loan, interest rates may be higher with a higher LVR, loan to value ratio. Meaning if you provided less of a deposit your LVR would be higher resulting in a higher interest rate.
Really there is no comparison between conforming and non-conforming loans because both loans meet the needs of different borrowers. But generally if you can, it is best to apply for a conforming loan, however if you do not meet the lending criteria then a non-conforming loan is your best option. You cannot compare apples with oranges, both are good in their own way. Conforming or non-conforming, it’s your choice, choose wisely.
By receiving a bad credit mortgage and then making regular on-time payments, borrowers with poor credit can boost their credit scores over time. Likewise, if you manage this loan well for a few years, you can refinance and move over to a conforming / prime lender.