Nontraditional Loans

• Nontraditional mortgage lenders specialize in selling nonconforming or nontraditional loans. Conforming, or traditional, loans impose certain borrower requirements, such as a good credit history, income-to-debt ratios, employment history and a sufficient down payment amount. Requirements for traditional home mortgages are set by the United States Department of Housing and Urban Development (HUD). By selling nonconforming loans, lenders can work with borrowers who fail to meet the qualification guidelines required for traditional loans. In effect, nontraditional lenders market to people who would otherwise not qualify for a mortgage loan. As a result, lenders can offer more flexible loan terms that permit borrowers to defer principal or interest payments during specified periods throughout the course of the loan repayment schedule.
  
  

Mortgage Costs

• The flexible payment options available through nontraditional mortgage loans gives lenders a certain degree of flexibility when it comes to setting interest rates and fees. As a result, the types of loans sold by nontraditional lenders often carry higher interest rates and fees than those that come with traditional loans. As far as mortgage lending goes, the higher the risk, the higher the costs involved. Borrowers who fail to meet the requirements under traditional loans pose a higher risk to lenders, which in turn justifies the increase in interest and fee charges.
  
  

Risk Trade-offs

• In order to protect themselves against financial loss, nontraditional mortgage lender contracts have built-in features or conditions that enable lenders to balance out whatever risks a borrower carries. High-risk borrowers may have bad credit histories, a large amount of debt, bankruptcies or previous home foreclosures. Risk also increases in cases where a borrower is unable to put down a significant down payment. From the lender's viewpoint, no down payment or a small down payment makes it easier for a homeowner to walk away from his mortgage obligation since he has no equity in the home. To protect their investments, nontraditional lenders often charge higher interest rates and impose high fees for late charges and in some cases for paying off a loan early.
  
  

Considerations

• Nontraditional mortgage lenders do provide a valuable service as far as making it possible for borrowers with blemished credit histories to finance a home purchase. And while many people would otherwise not be able to purchase a home, in some cases, borrowers can end up paying on a mortgage that eventually becomes unaffordable. Certain types of loans, such as adjustable-rate mortgages, interest-only loans and balloon payment options leave borrowers facing significant monthly payment increases and lump-sum payment requirements that they can't afford. Borrowers also can find themselves in situations where they end up owing more than a home is worth. This happens when minimum monthly payments only cover a portion of the monthly interest charges and nothing goes toward the loan principal. As a result, any unpaid portions are tacked onto the principal loan amount, which increases the total amount owed on the loan.