Non Traditional Loan Lenders: A Guide to Unconventional Financing Options

Non traditional loan lenders have become increasingly popular in recent years as more borrowers seek out alternative financing options beyond traditional banks. These lenders provide more flexible qualifying criteria, making home loans accessible to those who may not meet the strict requirements of conventional loans.

In this comprehensive guide, we will explain what non traditional lenders are, the types of non traditional loans they offer, their pros and cons, and tips for finding the right lender for your needs.

What are Non Traditional Loan Lenders?

Non traditional loan lenders also known as alternative or private lenders provide financing that falls outside of conventional mortgage lending offered by banks and credit unions.

While traditional lenders adhere to strict underwriting guidelines set by Fannie Mae, Freddie Mac, and other government agencies, non traditional lenders employ more flexible qualifying standards. They focus less on credit scores, income, and debt-to-income ratios. Instead, they consider factors like the property itself, the borrower’s assets, and their overall financial profile.

Non traditional lending sources include

• Private lenders and investors
• Mortgage brokers and bankers
• Credit unions
• Online lenders

These lenders serve borrowers who may not qualify for typical mortgages, such as self-employed individuals, those with recent credit events, or unique properties like rural land. Their loan offerings help make financing accessible to a broader range of homebuyers.

Types of Non Traditional Loans

Non traditional lenders provide a variety of loan products to choose from. Here are some of the most common types of non traditional mortgage loans

Jumbo Loans

Jumbo loans exceed the conforming loan limits set by Fannie Mae and Freddie Mac, which currently sit at $647,200. High-balance loans up to $970,800 in most areas also fall under this category.

Jumbo loans allow borrowers to finance pricier properties. They come with higher down payment requirements, usually at least 20%. Rates also tend to be slightly higher than conforming loans.

Alternative Documentation Loans

These loans, also called alt doc or stated income loans, allow borrowers to state their income on the application rather than provide traditional documentation like pay stubs or W-2s. This allows self-employed borrowers or those with non-traditional income sources to qualify more easily.

Interest-Only Loans

With an interest-only loan, you only pay the interest on the loan for an initial period, typically 5-10 years. After that, you begin making principal and interest payments. Interest-only loans offer lower monthly payments at first, but your payments will increase once principal repayment begins.

Hard Money Loans

Hard money loans are asset-based loans provided by private investors. The property itself serves as collateral rather than the borrower’s creditworthiness. Hard money loans are common for fix-and-flips or other real estate investments. They come with higher rates and aggressive repayment terms.

Non-Warrantable Condo Loans

Certain condos do not meet Fannie Mae’s requirements for warrantability and cannot be financed with conventional mortgages. Non traditional lenders provide financing options for these non-warrantable condos.

Foreign National Loans

Foreign nationals who want to purchase U.S. real estate can obtain non traditional loans that do not require a social security number. Common requirements include a substantial down payment, strong international credit history, and the ability to verify funds.

Pros and Cons of Non Traditional Loans

Non traditional loans provide more flexible qualifying criteria but also come with some drawbacks to consider.

Pros:

• Accessible to those with past credit problems or non-traditional employment
• Lower credit score and down payment requirements
• Funding quicker than conventional loans in some cases
• Alternative documentation options

Cons:

• Higher interest rates and fees
• Prepayment penalties may apply
• Potentially riskier loan structures like interest-only periods
• Difficult to refinance into conventional loan later
• Limited consumer protections compared to government programs

As you can see, non traditional loans make getting a mortgage possible for those who may not qualify through typical lenders. However, the additional flexibility comes at a price. Make sure to weigh the pros and cons carefully when considering a non traditional loan.

Tips for Finding the Right Non Traditional Lender

If you think a non traditional loan is right for you, here are some tips as you search for the ideal lender:

• Ask friends or your real estate agent for referrals. People you trust can recommend lenders they’ve worked with successfully.

• Check for proper licensing. Make sure the lender is properly registered in your state to legally provide loans.

• Vet lenders thoroughly. Research companies online and check for complaints with the Better Business Bureau. Avoid lenders who seem sketchy or too good to be true.

• Compare options. Talk to multiple lenders and compare interest rates, fees, and loan terms. Don’t jump at the first offer.

• Read the fine print. Understand the loan details like payments, rate adjustments, penalties, etc. Ask questions if you don’t understand.

• Seek out customer reviews. Feedback from past clients can reveal helpful insights into a lender’s services.

Taking the time to find the right non traditional lender for your needs is key to getting the ideal financing solution.

Are Non Traditional Loans Right for You?

While non traditional loans provide many benefits, they are not the best option for every borrower. Consider your own financial situation and needs when determining if pursuing a non traditional mortgage makes sense.

These loans generally work best for borrowers who:

• Don’t meet requirements for a conventional loan
• Have less-than-perfect credit or unique income streams
• Need to close quickly on a purchase
• Can qualify for better terms than conventional loans (i.e. can get lower non traditional rates due to significant assets)

On the other hand, non traditional loans may not be the best choice if:

• You qualify for conventional financing at better rates/terms
• You are uncomfortable with less consumer protections and oversight
• You want the structure and predictability of a fixed-rate loan
• You plan to stay in the home long term and want to build equity

Speaking with a loan officer early in the mortgage process can help you determine if you should pursue traditional or non traditional lending options. Be sure to ask about different loan types, rates, fees, and eligibility requirements. This will provide the information needed to make the right financing decision for your situation.

The Bottom Line

Non traditional loan lenders provide a valuable service by supplying financing options to borrowers ill-served by conventional banks. If your circumstances have prevented you from qualifying for a typical mortgage, non traditional lenders can be an avenue to homeownership.

That said, non traditional loans do come with greater costs and risks in many cases. You must educate yourself on the options and find a reputable lender committed to your best interests. Taking the time to make the right choice can put you on the path to achieving your real estate dreams.