Understanding Conforming vs Non-Conforming Loans
When applying for a mortgage, borrowers can choose between conforming loans and non-conforming loans. While both types can help you buy property, they differ in eligibility criteria, interest rates, and fees.
What Are Conforming Loans?
Conforming loans follow standard lending criteria and are typically offered by mainstream banks or prime lenders. These loans suit borrowers who have:
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Stable employment
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A clean credit history
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Verifiable income (e.g. PAYG statements, payslips)
Lenders usually expect a minimum credit score. In Australia, credit scores range from 0 (poor) to 1,200 (excellent). Those with strong financial records are more likely to qualify.
Application Process for Conforming Loans
To apply, borrowers must submit:
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Proof of identity
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Personal bank statements
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Tax returns
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Payslips
If everything checks out, the bank approves the loan within a few days. Once approved, the borrower signs the paperwork and receives the loan funds to purchase the property.
What Are Non-Conforming Loans?
Non-conforming loans suit borrowers who don’t meet the strict requirements of mainstream lenders. Specialist lenders offer these loans to people with:
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Poor credit
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A past bankruptcy
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Irregular or hard-to-verify income (e.g. self-employed individuals)
These loans provide greater flexibility and give borrowers access to financing that might otherwise be unavailable.
Types of Non-Conforming Loans
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Bad Credit Home Loans
These loans cater to borrowers with damaged credit histories. Lenders assess the reasons behind the bad credit and consider any mitigating factors. Reliable income still plays a key role in approval. -
Debt Consolidation Home Loans
These loans combine multiple repayments into a single monthly payment. While this often results in a lower interest rate and longer repayment term, it usually leads to more interest paid over time.
Cost Comparison: Which Loan Type Is More Expensive?
Non-conforming loans generally cost more than conforming ones. The interest rate and fees vary based on the borrower’s financial profile.
For example:
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Borrowers with bad credit may pay 1% to 5% more than those with good credit.
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Borrowers with strong income but unique circumstances may pay only 0.1% to 0.5% more.
Final Thoughts
Choosing between conforming and non-conforming loans depends on your financial situation. If you meet standard lending criteria, a conforming loan will likely offer lower costs. However, a non-conforming loan can be a valuable solution if your circumstances fall outside the norm.
Make sure to compare offers and seek advice from a mortgage broker or financial adviser to find the loan that suits your needs.
