Unconventional Mortgages and Loans

I get asked on almost a daily basis what exactly unconventional lending means. Many people have never heard of an unconventional mortgage or an unconventional loan. Basically, most of these types of loans fall under the category of subprime loans.

Normally, loans are offered at the prevailing interest rate of the time when the borrower is approved for such a loan. However, for whatever reason many borrowers do not meet the credit score requirements for a certain loan amount at a certain interest rate. But that person may be very interested in obtaining a loan of that amount, whether it be for a new house or a new business venture. Unconventional lending offers them the potential ability to acquire such a loan amount at a higher then prime interest rate. This is known as a subprime loan.

Subprime loans are generally only available during strong economic periods. This is exactly what we witnessed a few years ago. Unfortunately, when the economy rapidly weakened, the subprime lending market dried up, and all the variable interest rates were jacked up. Most homeowners who took out a subprime loan are not able to refinance until their credit is a little stronger. As such, many people are now stuck with an interest rate which is spiraling out of control.

Subprime loans are the first type of financing to dry up when the market collapses. This makes perfect sense; when the economy is good, unemployment is down and people are being paid more, they are less likely to default on their debt. When the opposite is the case, people with lower credit scores become much riskier investments.

So, unconventional lending can be a very neat tool for getting someone into a home who is a slightly riskier investment for a lender. But when things go sour, the funding dries up and subprime loans can be very difficult to obtain.