Alternative Loans

Let's clear one thing up right off the bat—alternative loans are not bad loans.

For borrowers who might struggle with conventional loan approval, there are alternative loan options. These include non-conforming loans, stated income loans, Alt-A loans, portfolio loans, and more.

For the right borrower, a good alternative loan can provide purchasing power where a conventional loan would not.

What is an alternative loan?

Alternative loans are designed to help atypical buyers secure financing. 

Atypical buyers can include people who: 

• are self-employed 
• get their income from unique sources
• do not have established credit
• have other life circumstances that make getting a traditional loan difficult.

These loans can also be used for properties that do not meet typical criteria.

It can be hard to get traditional or conventional loans for certain types of properties. In some cases, an alternative loan can help a borrower to get into a home that wouldn't be suitable under conventional or government-backed loan guidelines.

What are the benefits of an alternative loan?

The primary benefit of an alternative loan is the ability to buy when the borrower or property doesn't meet conventional guidelines.

Buyers who want unique properties or aren't financially positioned to get a conventional loan can still be property owners through alternative loans. These buyers might have high debt-to-income ratios, lower down payments, or credit struggles, among other concerns.

Alternative loans can be a game-changer for these types of buyers.

Alternative loan requirements

The requirements for an alternative loan differ significantly from those of a traditional loan. In most cases, the requirements are more relaxed. 

For example, a buyer may not have to show all their income sources, or they may be able to get a loan even if their employment history is inconsistent or difficult to verify.

Here are some specific areas to consider when looking at alternative loan requirements.

Down payment

Some alternative loans allow for a low to nonexistent down payment. Other alternative loans require a much larger down payment, such as 50 percent.

The requirements vary from lender to lender since there is no official oversight by the government or fannie and freddie. The rules here are more flexible.

Credit score

For buyers with credit problems, or for those who haven't established credit at all, there are alternative loans that allow borrowers to have a lower credit score than conventional and government loans require.

There are also some alternative loans available for buyers who do not yet have a credit profile. This could be because the buyer is very young or has simply chosen not to have credit cards or incur other debt.

Credit history

Buyers with major blemishes or very short credit history on their report might struggle to get a conventional loan. This is where alternative loans have the potential to provide potential buyers with purchasing power.

If the credit history is short, it has been a long time since credit has been used, or there are late payments, judgments, and other types of problems, a conventional loan may not be a realistic option.

Alternative loans don't always look at credit history the same way a conventional loan would, and that can make all the difference for an atypical buyer.

Debt-to-income

It matters how much debt you have and also how much money you bring in. If a buyer has a lot of debt and not much regular income, they may not qualify for a standard loan. 

However, by carefully looking at other circumstances, there are ways for some companies to offer alternative loan options. In some cases, this can include stated income loans, where the buyer's income isn't subject to verification.

An example of when this might be helpful is if a borrower has a wealthy parent who regularly disperses portions of their inheritance, but has no official paperwork to prove it will continue.

If the borrower is reasonably certain the regular income will be available, they might feel confident taking on loan debt but would have a difficult time getting a conventional loan without proving the income could be relied upon in the future.

Employment history

Not everyone has a traditional employment history. Some people are self-employed, newly employed, moved to a position, or are working in a completely new field. Any of these scenarios might stand in the way of getting a traditional loan, but wouldn't necessarily exclude the borrower from obtaining an alternative loan. 

In some cases, an alternative loan can pave the way for someone with a unique employment situation to get into the home they really love.

Sometimes even a career change that is too recent can prevent someone from getting a loan by conventional means, even if their income is high and all other underwriting standards are met.

Sometimes lousy timing can be all it takes to derail an otherwise perfectly eligible borrower, and an alternative loan can provide a solution.

Should you apply for an alternative loan?

Applying for an alternative loan is easy with the right lender. Still, it's critical to understand the details and work with a mortgage advisor who can help steer you in the right direction, and make sure you're comfortable with the debt you plan to take on.  

The fine print is very fine and is there for a reason. Make sure you read and understand it, so you know what kind of loan product you are purchasing. 

Interest rates are often higher for non-conventional loans. Even with a good rate and good terms, being honest with yourself about what you can afford matters. Overstating your income, understating your debt, or otherwise providing false information to get a loan can put you in a severe financial bind.

Do your homework before choosing an alternative loan, so you can get a loan that works for you and a house you truly love.