What is a non-conforming loan?

It is important to be aware of the distinction between low-doc home loans and non-conforming home loan products.

What is the difference?

While both waive the requirement to sight and retain copies of the applicant's tax returns and financial statements, low-doc loans are almost exclusively available to people with an unblemished credit history, are mortgage insured, and generally do not want to borrow more than 80 per cent of the security's value.

What are non-conforming loans?

Non-conforming loans on the other hand are mortgages that do not conform to a lender's typical loan underwriting criteria. This may include situations where the applicant has a poor credit history, or who may not have been employed long enough to show a history of earning an income.

Non-conforming loans may exceed 80 per cent of the security's value and the interest rate is based on the severity of the credit history.

What are low-doc home loans?

A low-doc loan is generally made to a borrower with a clean credit history and therefore the most important factor for the lender to consider is the value of the asset being used as security. Because the asset is vital to these loans, the location of the security is also imperative and hence insurers and lenders alike may not lend in high-risk areas such as inner city high-rises or large rural allotments.

The $10 billion non-conforming market is growing by up to 40 per cent per year, according to some industry players. It is dominated by players such as Liberty Financial, GE, Bluestone and Pepper Homeloans.

Regulators say they are keeping a close eye on the sector to ensure appropriate credit standards are maintained.

Non-conforming loans generate delinquency rates 10 times that on premium products but can charge double-digit interest rates if a loan-to-value ratio is sufficiently high.

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