How do you get an unorthodox loan?
An unorthodox loan is defined as a loan that is not obtained through ordinary lenders or through ordinary channels. It may be a situation where your income is variable, 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 return, employer reference or statement probably doesn’t 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 risk are they willing to take and how flexible are they in applying a solution for these risks? The typical lender of choice for people is a bank. Banks are known for being 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 may cost you a lot. Banks should not be ruled out because there are cases in which exceptions are made depending on how the loan is proposed. 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 service real estate or business deals. Smaller institutions like credit unions or smaller banks may not be as strict as major banks. Mortgage brokers are people who can shop around and find the best deal from many different lenders, both traditional and non-traditional. If one type of lender doesn’t give you a satisfactory loan, try another type of lender.
What are the lenders’ concerns?
Depending on what the money is being borrowed for, different options are available.
The underlying issues in obtaining a loan for the lender are: Can I trust the borrower to repay the loan on time? Is the thing he is borrowing money for valuable over time? What risks are there that the 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 that the risks are under control, you can get a loan a high percentage of the time.
What is the money lent for?
If you are looking for a loan on an asset that generates income or is likely to appreciate in value, the risks associated with the loan may be limited to looking at the asset alone. For example, if you are looking for a rental property loan and there is a history of consistent income over a long period of time, this loan would be considered lower risk. Whether the borrower has any other income may not be relevant. The assets and financial history of the borrowers may also not be important. A similar example might be a business with a proven history of earning. If statements from an unbiased third party can show how much the business earns, the borrower’s track record may not count in this situation. If the property under consideration is land that has a long horizon before it is developed or a new business with no track record, the lender may resort to asking for something else as collateral or relying on the borrower himself to be solvent.
Does the borrower have other ways to repay the loan?
The borrower may want to borrow money to purchase a piece of land that has no income, but there are 5 other rental properties that are paid in full and are generating 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 generates 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, conventional lending can become riskier if people lose their jobs and can’t repay loans. A real estate correction can mean that the value of residential homes can plummet, making the collateral worth less than the loan, creating a foreclosure loss. For an unorthodox loan, the risks may be more specific. If the loan is for a small auto parts manufacturer and there is a massive withdrawal of their key customer, the revenue of this business can decrease significantly while other auto parts businesses are not affected. Real estate in a given area may dip due to falling oil prices and not dip in an area dominated by nursing homes. A natural disaster in one part of the country can devastate the local economy in that area but not surrounding areas. The lender has to assess these risks before making the loan, and depending on what the terms are at the time, some loans will 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 you’re not the first person, there’s a priority sequence where you’d be second, third, etc. This would mean that the first person gets 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, the lenders following the first lender may be taking on greater risks and the cost of these loans will be higher.
Getting an unorthodox loan is more complex than a conventional loan, and more work would have to be done to secure this loan. However, there are more options available depending on the situation, and these should be explored in detail and taken into account as the needs of both borrower and lender change.