An unorthodox loan is defined as a loan that is not obtained through the usual lenders or through the usual channels. There may be a situation where your income is fluctuating, your purpose for the loan is unconventional, you own a business, or a loan is for investment purposes. Since the typical proof of income, tax returns, job references, or bank statements probably won’t apply to you, there’s information you can use to expand your borrowing options.
Who is the lender?
The first variable to consider is: who is the lender? The underlying questions are: What types of risks are they willing to take and how flexible are they in applying a solution to those risks? The typical lender of choice for people is a bank. Banks are known for being conservative and conventional in their lending practices. If you have substandard risks, you probably won’t get the best deal on your loan, or the loan may come at a high cost. Banks should not be excluded as there are cases where exceptions are made depending on how the loan is treated. Other lenders available to you as a borrower are private lenders, smaller institutes or mortgage brokers. Private lenders lend their own money and can make real estate or business deals. Smaller institutions like credit unions or smaller banks may not be as strict as the big banks. Mortgage brokers are people who can look around and find the best deal among 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 lender concerns?
There are different options available depending on what the money is being borrowed for.
The underlying issues for the lender in lending are: As a borrower, can I trust you to repay the loan on time? Is the thing you’re borrowing money for valuable over time? What are the risks that the current circumstances will change and endanger me? Am I making enough money to make this loan worthwhile? 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 seeking credit for an asset that is generating income or is likely to appreciate in value, the risks associated with the loan can be limited to looking at the asset alone. For example, if you are looking for a rental loan and have had consistent income over a long period of time, that loan will be considered lower risk. Whether the borrower has any other income may not be relevant. The net worth and financial history of the borrowers may not be important either. A similar example can be a company with a proven track record. If testimonies from an impartial third party can show how much the company makes, the history of the borrower can be disregarded in this situation. If the property under consideration is a property with long development horizons or a new business with no track record, the lender may resort to requiring other security or relying on the borrower’s own creditworthiness.
Does the borrower have other options to pay 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 fully paid for and generating income that far exceeds the value of the loan. The risk of this venture is low as long as the lender has these rental properties as collateral. If this is not the case and the property is assessed as a standalone situation, the lender may refuse the loan or charge a much higher interest rate. Other means of paying back a loan include a business that generates a lot of cash flow, or a guaranteed return on investment from another source.
What is the possibility of market conditions changing?
This is a risk that can affect both traditional and unorthodox loans. The risks vary depending on the situation. When the risk of non-payment stems from an economic recession and widespread layoffs, the traditional loan can become riskier as people lose their jobs and are unable to repay the loans. A real estate correction can mean that homes can decline in value, making the collateral worth less than the loan, resulting in a loss in foreclosure. With an unorthodox loan, the risks can be more specific. If the loan is intended for a small auto parts maker and there is a massive recall from its major customer, that business’s revenue can drop significantly while other auto parts companies are unaffected. Real estate in a particular area may decline due to the crash in oil prices and not in an area dominated by retirement homes. A natural disaster in one part of the country can destroy the local economy in that area, but not in the surrounding areas. The lender needs to assess these risks before lending, and depending on current conditions, some loans would be perceived as riskier than others.
Who else do you borrow money from?
Lenders want to know they are the first to get paid. If you are not first person, there is an order of priority where you would be second, third, etc. This would mean that the first person in a foreclosure would have access to the collateral first. You would also get first access to any remaining payments if they are not made on time. If you borrow from more than one lender, lenders after the first lender may take on greater risks and the cost of those loans will be higher.
Obtaining an unorthodox loan is more complex than a traditional loan and more work would need to be done to secure this loan. However, depending on the situation, there are other options available that need to be explored in detail and considered as the needs change for both the borrower and the lender.