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Understanding Near-Prime and Non-Conforming Specialist Loans

If you’ve ever applied for a loan, particularly a mortgage, you’ll be aware of the hoops you’re required to jump through to get a loan approved by a lender, even if you decide to go with a broker. There are documents to provide, budgets to complete, and often a significant deposit to put down. The process can be intense enough for someone with steady employment and a perfectly clean credit history – so what about those who are recently self-employed, have a history of credit events, missed loan repayments and/or adverse credit history or a mixture of any of these? The good news is, there are lenders offering near-prime and non-conforming specialist loans, providing a suitable alternative if you aren’t able to meet the standard criteria for the more common loan facilities.

An Overview of Near-Prime and Specialist Loans

For those working a salaried job and have been employed consistently for a long period of time, “prime full doc” loans are generally obtainable as substantiating your income is relatively straightforward. Specialist and near-prime loans offer an alternative to prime loans, and can be an effective route to obtaining finance for those who are self-employed or who have poor credit history. These alternative finance options can be grouped into the following categories:

Prime Alt Doc Loans: This facility typically offers competitive interest rates and gives self-employed borrowers the opportunity to use income verification outside the typical payslips and tax returns. Some self-employed business owners may have only recently started or not be able to provide two years of complete year-end financials, or their full-year financials aren’t indicative of prevailing trading conditions. Complex structures may also be a hurdle for some in providing full documentation required when applying for full doc loans, so alt doc loans allow alternative documentation to demonstrate current income.

Specialist (Non-Conforming) Loans: These loans are often associated with debt consolidation, but can be used for a much wider range of borrowing. If you have poor credit history, diverse credit needs (i.e. beyond simple purchase and refinance), or you are using security that is deemed “risky” by lenders, specialist loans may be an option for you.

• Specialist full doc loans could be used when a borrower has regular income and can substantiate that with standard documentation, but perhaps their credit history has a few blemishes, or their income comes from a variety of sources.
• Specialist alt doc loans are often suitable for borrowers whose credit history isn’t ideal, and they cannot meet the requirements for a full doc application – which can be the case with the self-employed.

Near prime and specialist loans do not necessarily carry a higher interest rate, although that is generally the case. Lenders offering these products may still include additional benefits like offset accounts and redraw facilities.

Who Can Benefit from Near-Prime or Specialist Loans?

There are a variety of circumstances and situations that prompt borrowers to seek out near-prime or specialist loan products. Here’s a brief overview of some of those key groups:

• Employment Arrangements Outside the Ordinary: Some people move between jobs regularly, or enjoy a work-life balance that doesn’t conform to the typical “nine to five” routine. This means that while their income is regular, they may not be able to show the ongoing employment standards required by full doc prime loans. Near-prime and specialist loans give options for borrowers with different employment types, or periods, fixed-term contractors, permanent part-time, recently self-employed or those on probation with a new employer.
• Poor Credit History: A number of lenders offer products for those who have poor credit history, because financial setbacks can happen to anyone! These can include those with adverse credit events, mortgage arrears, or have been declared bankrupt. Particularly in cases where circumstances have changed and a borrower now has the capacity to make repayments, some specialist lenders may even be willing to approve a loan before a credit report is clean.
• Unique Security Scenarios: Sometimes, a loan applicant may be in a strong financial position and otherwise qualify for a prime full doc loan, but the actual security or loan size and deposit may be outside the norm. An example of this situation would be a customer applying for a loan to buy a property in an area that the lender considers “risky”, and the loan size or loan-to-value ratio doesn’t fit within the lender’s policy for a prime full doc loan. In these cases, specialist loans may provide an alternative option.

Fees and charges associated with a near-prime or specialist loan will vary depending on the lender, and sometimes include a risk fee (which functions similarly to lender’s mortgage insurance in a prime full doc loan), application/settlement fee, and other fees and charges. Your loan documents and broker will outline these for you before anything is signed off.

Documentation & Information Required

Lenders will have their own documentation requirements in order to determine your income and ability to service a near-prime or specialist loan. However, lenders will generally require the following.

Alt doc income documentation: Typically, prime alt doc or specialist alt doc loans can be applied for using one of the following:

• An accountant’s declaration/verification of your income.
• Two quarters’ worth of lodged Business Activity Statements (BAS) from your business.
• Six months’ worth of business bank statements that show the recent 180 days of income and expenses in your business. The statements should also clearly show your account number, your details, and your financial institution’s details.

Full doc income documentation: Specialist full doc loans typically require the same income information as prime full doc loans, like payslips or two years’ worth of end-of-year financials. For specialist loans however, proof-of-income documents from all income sources are required.

Credit History: Specialist loans are designed for people with a history of credit events – that is, those who may have defaults on their record. This means being transparent about your credit history is not only a requirement, but will actually improve your chances of the loan being approved. Many specialist lenders will consider some minor credit events as immaterial and therefore not count them towards your total number of credit events. Some considered “immaterial” could include defaults below $2,000, defaults paid more than 12 months prior to the application date, or defaults listed more than two years prior to the application date. Even if you have a number of significant credit events on your record, there are a number of specialists lenders that may still be able to provide finance.

How MP+ Can Help

It can be challenging to navigate the complex world of finance, and this is where our Finance team comes in. Our brokers will work with you to understand your unique circumstances, and help you through the process of applying for a near-prime or specialist loan if it is appropriate for your needs. You can reach us on 08 9301 2200, or contact us via our website.

written by:

Paul Moran

Paul has over 35 years of experience in finding financial solutions for homebuyers, investors and business owners.
A licensed broker and member of the Mortgage & Finance Association of Australia (MFAA), Paul’s extensive experience includes 20 years with a major bank, seven of which were as commercial banking manager.
Paul delivers a holistic financial solutions to achieve the best possible outcome for a client’s personal or commercial lending needs. Paul also provides a comprehensive financial consultancy to business owners on commercial, equipment and invoice finance.