An unorthodox loan is defined as a loan that is not obtained through common lenders or through common channels. It could be a situation where your income is variable, your loan purpose is unconventional, you own a business, or a loan is for investment purposes. Since the typical proof of income, tax return, employer reference, or bank statement probably won’t apply to you, there is information you can use to broaden your loan options.
Who is the lender?
The first variable to consider is: Who is the lender? The underlying questions here are: What types of risks are they willing to take, and how flexible are they in applying a solution for these risks? The typical lender of choice for individuals is a bank. Banks are known to be conservative and conventional in their lending practices. So, if you have non-standard risks, you may not get the best deal on your loan, or the loan may be costly. Banks should not be ruled out because there are cases in which exceptions are made depending on how the loan is presented. Other lenders that are available to you as a borrower are private lenders, smaller institutions, or mortgage brokers. Private lenders are lending their own money and may service real estate or business deals. Smaller institutions, such as credit unions or smaller banks, may not be as strict as major banks. Mortgage brokers are people who can shop around and find the best deal from many different lenders, both traditional and non-traditional. If one type of lender doesn’t give you a satisfactory loan, try another type of lender.
What are the concerns of lenders?
Depending on what the money is borrowed for, different options are available.
The underlying issues in obtaining a loan for the lender are: Can I trust that the borrower will repay the loan on time? Is the thing he is borrowing money for valuable over time? What risks are there that current circumstances change, putting me at risk? Will I make enough money to make this loan worth it? If you can show that you can repay the loan and that the risks are under control, you can get a loan a high percentage of the time.
What is the money loaned for?
If you’re looking for a loan for an asset that generates income or is likely to increase in value, the risks associated with the loan may be limited to looking at just the asset. For example, if you are looking for a loan for a rental property and there is a history of consistent income over a long period of time, this loan would be considered lower risk. Whether the borrower has any other income may not be relevant. The assets and financial history of the borrowers may also not be important. A similar example might be a business with a proven track record of revenue. If statements from an unbiased third party can show how much the business earns, the borrower’s track record may not be considered in this situation. If the property considered is a piece of land that has a long horizon before it is developed or a new business without a history, the lender can resort to asking for something else as a guarantee or trust that the borrower himself is solvent.
Does the borrower have other ways to repay the loan?
The borrower may want to borrow money to buy a piece of land that has no income, but there are 5 other rental properties that are paid in full and are generating income that far exceeds the value of the loan. The risk of this venture is low as long as the lender has access to these rental properties as collateral. If they don’t and the land is being appraised as a stand-alone item, the lender may decline the loan or charge a much higher interest rate. Other means of repaying a loan are a cash-intensive business or guaranteed investment income from another source.
What is the chance that market conditions will change?
This is a risk that can affect both conventional and non-orthodox loans. The risks are different depending on the situation. If the risk of default comes from an economic downturn and widespread layoffs, conventional lending can become riskier if people lose their jobs and can’t pay back the loans. A real estate correction can mean that the value of residential homes can plummet, making the collateral worth less than the loan, creating a foreclosure loss. For an unorthodox loan, the risks can be more specific. If the loan is for a small auto parts manufacturer and there is a massive withdrawal from its key customer, the revenue of this business may drop significantly while other auto parts businesses are not affected. Real estate in a given area can take a dip due to falling oil prices and not take a dip in an area dominated by senior living. A natural disaster in one part of the country can devastate the local economy in that area but not in the surrounding areas. The lender has to assess these risks before making the loan, and depending on what the conditions are at the time, some loans will be perceived as riskier than others.
Who else are you borrowing money from?
Lenders want to know that they are the first person to get paid. If you are not the first person, there is a priority sequence in which you would be the second, the third, etc. This would mean that the first person gets access to collateral first in a foreclosure. They would also get first access to residual payments if they are not made on time. If you are borrowing from more than one lender, the lenders that follow the first lender may be taking on greater risks and the cost of these loans will be higher.
Obtaining a non-orthodox loan is more complex than a conventional loan, and more work would be required to secure this loan. However, there are more options available depending on the situation, and these should be explored in detail and taken into account as the needs of both the borrower and the lender change.