What Is a Non-Traditional Mortgage Loan?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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If you don’t qualify for a conventional loan, you might be wondering what other mortgage options are available. Apart from the conventional and unconventional loans, which are often put together under the umbrella term “non-traditional mortgages,” there are various options for you.

But what exactly is a non-traditional mortgage, and is it even right for you? Keep reading to learn how non-traditional mortgage loans work, how they compare with traditional mortgages, the pros and cons, and where to get one. 

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

What are Non-Traditional Mortgage Loans and How Do They Work?

A non-traditional mortgage is a loan product that doesn’t meet the requirements of a conventional or an unconventional loan. These types of mortgages don’t follow the traditional amortization schedule or have standard, fixed installment payments.

Non-traditional mortgage loans offer more flexibility when it comes to how borrowers can repay. For example, instead of amortizing the loan and giving you a fixed repayment schedule, you can defer your payments, typically the principal balances and sometimes interest.

How Do They Compare to Traditional Mortgage Loans?

One major difference between non-traditional and traditional mortgage loans is the repayment terms.

With a traditional mortgage, repayment terms are pretty simple. To purchase or refinance your home, you borrow a certain amount from your lender, whereby you’ll pay back the principal plus a fixed or variable interest rate. You then make monthly payments toward the loan until you pay it off in full to own the property.

However, with non-traditional mortgage products, repayments terms work differently. Instead of making payments over a predetermined period, you have more flexibility with your repayment. For example, you can defer your principal payments until the interest-only period ends.

Typical Characteristics of a Non-Traditional Mortgage Loan

Non-traditional mortgage loan products share the following common traits:

Easier to Qualify

If you don’t qualify for a traditional mortgage due to low credit scores or a high debt-to-income ratio, you can easily qualify for a non-traditional mortgage loan. 

Nonstandard Amortization Schedule

Traditionally, conventional mortgages have an amortization schedule where you make fixed installments over the term of your loan. With non-traditional loans, though, there’s no such thing as an amortization schedule.

Flexible Repayment Terms

These mortgage loans offer borrowers more flexibility on repayment terms, meaning you can structure your monthly payments to suit your current financial situation.

Higher Risk

Non-traditional mortgages are typically associated with a high risk due to lower credit score requirements, negative amortization, and abnormal repayment terms.

Higher Rates

The convenience you get with non-traditional mortgage products comes with trade-offs 一 high-interest rates, which may increase the amount you eventually pay in full.

Traditional and NQ Mortgage Loans

 
Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

Allows for Principal and Interest Deferral

With a non-traditional mortgage, you can defer your principal balance and, in some scenarios, interest. This gives you more flexibility as you can repay the loan in one large lump sum once it matures.

What are the Benefits of Non-Traditional Mortgage Loans?

Offers More Flexibility: Most non-traditional mortgage products allow you to make lower monthly payments or pay off your principal in one large lump sum once it reaches maturity.

  • Quickly Amass Wealth Before Making Payment: You can quickly accumulate wealth with this mortgage type as it gives you the opportunity to make a full payment at a later date.
  • Afford a Home Sooner: There’s a high chance of purchasing a property sooner with loans like interest-only mortgages because monthly payments are typically lower than traditional mortgages.
  • Pay Off the Loan Faster: Another perk of using a non-traditional mortgage is the ability to repay the loan faster due to the fact that these loans are short-term.

Are There Risks in Getting a Non-Traditional Mortgage Loan?

  • High-Interest Rates: One obvious disadvantage of non-traditional loans is the potentially high-interest payments. While not all unconventional loans have high rates, most of them are adjustable-rate mortgages (ARMs), which can increase your rate at any moment. Additionally, since these loans have lenient credit scores and DTI requirements, mortgage lenders charge higher rates to offset their lending risk.
  • High Risk of Defaulting: Flexible payments offer great benefits to borrowers, but the outcome can be devastating. For example, if you make the minimum payments or defer them, the amount you owe could pile into an unaffordable amount, thus the risk of defaulting. 
  • No Equity: Building equity on your home can be difficult, and it can be even harder with non-traditional loans since you only pay interest on your loan.

Types of Non-Traditional Mortgage Loans

There are three common types of non-traditional mortgage loans:

Balloon Loans

A balloon loan is a mortgage that offers a one-time lump sum payment schedule. In other words, you’ll need to pay off your loan in full at one point in your loan term, typically at maturity. You’ll have the option to pay interest only throughout the loan term and the principal at the end of your loan term, or you may pay a combination of both and make one large lump sum payment at a later date.

A balloon loan gives you the flexibility to put your money toward another project before making payments. This type of non-conventional mortgage is ideal for homeowners who know they can pay the lump sum soon to get rid of balloon payments.

Interest-Only Mortgage

As the name suggests, interest-only loans are mortgage products that allow you to pay interest for a set number of years, and after this, the lender may require you to pay off the loan amount balance in one lump sum. Alternatively, the lender may require you to follow an amortized schedule for the remaining loan period.

Payment-Option Adjustable-Rate Mortgages

Payment option ARMs are another flexible loan type for mortgage borrowers. ARMs allow borrowers to choose how they want to pay off their loans, including 4-, 15-, 30-year fully amortized payments, minimum or monthly payments, or interest-only payments.

It’s important to note that ARMs can be very risky since interest rates change from time to time. They are therefore ideal for individuals looking to make short-term investments.

Is it a Good Idea to Get a Non-Traditional Mortgage Loan?

Non-traditional mortgage loans come with several benefits: flexible and reduced monthly mortgage payments than traditional loans, making them more appealing. If you need financing for the short term or have a unique situation that requires a low-cost unconventional loan, then this might be right for you.

However, before you get a non-traditional mortgage, ensure that you do your due diligence and determine whether it’s suitable for you. Also, consider if you can weather the storm if the worst-case scenario happens. 

Get a Non-Traditional Mortgage Loan

If you’re seeking a non-traditional mortgage, Angel Oak Home Loans got you covered. It offers not only different types of mortgages but also a flexible payment schedule. In addition, as a full-service mortgage lender, you’ll get a variety of mortgage products, including:

The application process for a non-traditional mortgage loan through Angel Oak Home Loans is very simple. All you need is to meet the requirements, which may vary depending on the type of mortgage you’re looking to get.

Complete a simple online form to inquire about Angel Oak Home Loans’ traditional and non-traditional mortgage products.

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