A non-conforming (or “specialist”) loan is a loan that fails to meet normal bank criteria for funding. They are generally seen as higher risk lending, which is why borrowers that fall under this category may find it more difficult (or impossible) to get a standard home loan.

Non-conforming loans fill a place in the market that many lenders don’t wish to play in – and as a result, you can expect higher interest rates, lower borrowing margins (LVRs) as well as one-off risk fees of up to 2% or more, depending on the risk grading and LVR.

A large portion of real-estate loans are qualified as non-conforming because either the borrower's financial status or the property type does not meet bank guidelines.

Estimates are that as many as 1 in 4 potential home owners or existing borrowers fall into these categories and would be refused credit by mainstream lenders in most cases.

The lenders that consider these type of deals are generally funded by private money or other institutional lenders that have a different risk/return profile to traditional lenders. The flexibility of private money can allow for a much wider range of deals to be funded, although the costs associated with those borrowings are generally much higher.

The reasons for a borrower being classified as a non-conforming one often relate to credit impairment. i.e. credit record showing defaults, bankruptcy, court judgements etc. These are all reasons enough for mainstream lenders to not lend. Other non-conforming indicators can be:

• Self-employed

• Some low-doc circumstances

• Recently started a business

• Outstanding tax debts

• Numerous applications for credit

• Lack of employment stability

• Numerous unsecured or consumer debts (e.g. personal loans and credit cards)

• Unusual or unique property

Banks just don’t like that stuff.

Generally, they don’t care what the reason or excuse is, either – if you don’t fit the box, you don’t fit the box. The box doesn’t change shape to fit you. The way around that is to find another box!

The reality of these situations is that because they aren’t easily squeezed into a bank’s credit policy box, you (or more precisely, your broker) generally needs to look elsewhere for credit under these circumstances.

There are plenty of good reasons to choose a non-conforming solution. Firstly, if the deal needs has to be done, you need a solution – any solution. I see these occur in marital separation issues, loan or tax arrears circumstances where the alternative is to lose the house or the business – OR pay a higher rate to get the job done.

If you can’t get the result you need with normal lending channels, you need to consider if you really want to get it done. If you do - you may need to go down the non-conforming route to get the job done. There will be a cost to do that – and it is what it is.

If the need is great enough, the solution is available. The financial saviour comes, but at a price.

The important thing to remember about non-conforming loan situations is that once the dust has settled, once the crisis has passed – normally you are in the clear to refinance to another, generally mainstream lender – on a lower interest rate. Often, these situations are clarified within a couple of years – so it can be a year or two of higher rates – a bit of pain for long term gain.