An unorthodox loan is defined as a loan that is not obtained through common lenders or through common channels. It may be a situation where your income is variable, the purpose of the loan is unconventional, you are a business owner, or a loan is for investment purposes. Since the typical income test, tax return, employer reference, or statement will likely not apply to you, there is information you can use to expand your options for obtaining a loan.
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 when applying a solution for these risks? The typical lender of choice for people 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 is expensive. Banks should not be ruled out because there are cases where exceptions are made depending on how the loan is approached. 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 serve 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 compare prices and find the best deal from many different lenders, both traditional and non-traditional. If one type of lender does not provide you with a satisfactory loan, try another type of lender.
What are the lenders’ concerns?
Depending on what the borrowed money is being requested for, there are different options available.
The underlying issues in obtaining a loan for the lender are: Can I trust that you, the borrower, will repay the loan on time? Is what you are borrowing 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 the risks are under control, you can get a loan a high percentage of the time.
What is the money borrowed for?
If you are looking for a loan for an asset that generates income or is likely to appreciate, the risks associated with the loan can be limited to considering the asset alone. For example, if you are looking for a loan for a rental property and there is a history of constant income over a long period, this loan would be considered lower risk. If the borrower has other income it may not be relevant. Borrowers’ assets and financial history may also not be important. A similar example might be a company with a proven track record of income. If the statements of an unbiased third party can show how much the business earns, the borrower’s track record in this situation may be ignored. If the property under consideration is land that has a long horizon before being developed or a new business with no prior history, the lender may resort to asking for something else as collateral or trusting 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 land that has no income, but there are 5 other rental properties that are paid in full and generate 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 situation, the lender may decline the loan or charge a much higher interest rate. Other means of repaying a loan are a business that is generating a lot of cash flow 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 unorthodox loans. The risks are different depending on the situation. If the risk of default comes from an economic downturn and widespread layoffs, the conventional loan can become more risky if people lose their jobs and cannot repay the loans. A real estate correction can mean that residential home values 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 to a small auto parts manufacturer and there is a massive withdrawal from its key customer, this business’s revenues may decline significantly, while other auto parts businesses are unaffected. Real estate in a certain area can plunge due to falling oil prices and not plunge into an area dominated by senior residences. 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 granting the loan, and depending on the conditions at the time, some loans would be perceived as riskier than others.
Who else are you borrowing money from?
Lenders want to know that they are the first person to be paid. If it is not the first person, there is a priority sequence where it would be second, third, etc. This would mean that the first person has 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, lenders who follow the first lender may be taking higher risks and the cost of these loans will be higher.
Obtaining an unorthodox loan is more complex than a conventional loan, and it would take more work to secure this loan. However, there are more options available depending on the situation, and these should be explored in detail and considered as the needs of both the borrower and the lender change.