Risks and Benefits of Nonconforming Mortgage Programs

Conventional mortgages have always been popular with banks and consumers because they have very few risks. Banks know that their customers have the ability to repay their loans, and are able to offer low interest rates and predictable prerequisites.

Consumers should be aware that nonconforming mortgage programs are riskier than conventional mortgages, both for the bank and for the consumer. Some of the risks entailed include:

• Higher chance of foreclosure--Most people who seek alternative mortgages can afford the payment, but don't qualify for conventional mortgages because their financial stability is hard to prove on a traditional mortgage application. Other applicants, though, don't qualify for traditional mortgages because they don't earn enough to pay back the loan. Before applying for an alternative mortgage, consumers should carefully weigh their financial situations to ensure that they can pay.

• Higher required credit scores--Consumers who missed a few payments or got their cars repossessed won't be able to qualify for most alternative mortgage programs. Banks usually require credit scores in the high 600s for alternative loan programs.

• Higher interest rate--To help offset the additional risk of nonconforming mortgages, banks charge higher interest rates. Depending on the program, borrowers who qualify for conventional mortgages pay between .5 and 3 percent less than borrowers seeking alternative mortgages.

• Higher fees--In addition to higher interest rates, borrowers seeking alternative mortgages can expect to pay higher loan fees. Origination points and lender fees will typically be higher with nonconforming loan programs.

While there are risks associated with loans that do not conform to conventional standards, nonconforming loans also have some benefits. The benefits include:

• The ability to borrow money--Alternative mortgages were designed to give options to people who don't qualify for conforming loans. The biggest benefit of nonconforming loans is that they exist, and allow people who otherwise couldn't get mortgages to buy houses.

• Flexibility--Conventional mortgages are rigid. If your W-2s and credit reports don't show a certain debt to income ratio, or if the house you choose is too expensive, you don't get a loan. But nonconforming loans allow consumers to shop around for the program that suits them best.

• Lower monthly payments--Even with higher interest rates, nonconforming loans often have lower monthly payments than conventional loans. Banks require conforming borrowers who can't put down 20 percent to pay private mortgage insurance, which can cost $200 per month or more. Borrowers seeking alternative mortgages, though, typically do not have to pay this fee, even if they don't put any money down on their purchase.