Stylish living room with fireplace

Nontraditional Mortgages: What You Need To Know Before You Apply

The Short Version

  • A nontraditional mortgage is a unique loan that doesn’t fit the requirements of a conventional loan or an unconventional loan
  • Nontraditional mortgages tend to have unusual repayment terms and may allow borrowers to defer their payments or only pay interest until the end of the loan
  • There are three main types of nontraditional mortgage loans: balloon loans, interest-only mortgages and payment-option adjustable-rate mortgages (ARMs)


See what mortgage you qualify for

NMLS #3030

*See what you qualify for

We teamed up with Rocket Mortgage to help you get house-hunting sooner! Answer a few questions to get your commitment-free, personalized rate 💸

Get Started by selecting an option below

What kind of loan are you interested in?

What to expect

Tell us what you need and a representative from Rocket Mortgage will give you a call. You’ll have support at every step.

What kind of property do you want to purchase? What kind of property do you own?

Why we’re asking

Rocket Mortgage® can provide a more accurate rate estimate if they know what kind of property you’re interested in.

NMLS #3030
How do you use your property? How would you use this property?

Why we’re asking

Having a little more information upfront helps Rocket Mortgage® provide a personalized rate faster.

NMLS #3030
When are you planning to buy?

Still House Hunting?

Hope you find your dream home soon! In the meantime, it’s never too early to know your rate.

NMLS #3030
Are you a first-time home buyer?

It’s all good:

Whether it’s your first – or second property – Rocket Mortgage® can provide you with a rate estimate.

NMLS #3030
Do you have a second mortgage?

It’s all good

If you have a second mortgage, it’s no problem. Letting us know helps to customize your rate.

NMLS #3030
What is your credit score?

Don’t know your score?

Don’t sweat it! Make your best guess. Credit scores range from 300 (low) to 850 (excellent).

NMLS #3030

Tell us a bit more about you

What happens next?

A representative from Rocket Mortgage® will be in touch to discuss your commitment-free, personalized rate. Then you can decide whether you’d like to lock it in!

NMLS #3030

Enter your contact info so we can get in touch

By submitting your contact information you agree to our Terms of Use and our Security and Privacy Policy. You also expressly consent to having Rocket Mortgage, our Family of Companies, and potentially our mortgage partners contact you about your inquiry by text message or phone (including automatic telephone dialing system or an artificial or prerecorded voice) to the residential or cellular telephone number you have provided, even if that telephone number is on a corporate, state, or national Do Not Call Registry. You do not have to agree to receive such calls or messages as a condition of getting any services from Rocket Mortgage or its affiliates. By communicating with us by phone, you consent to calls being recorded and monitored.

NMLS #3030
Your information has been sent!

A home loan expert from Rocket Mortgage® will reach out to you soon with your personalized rate.

Your information has been sent!

A refinance expert from Rocket Mortgage® will reach out to you soon with your personalized rate.

If you can’t qualify for a conventional loan or just aren’t interested in one, you may be wondering what other home loans are out there. Well, there are lots of options to choose from. And many of those options fit under the umbrella of “nontraditional” mortgages. 

So what is a nontraditional mortgage, and is it the right choice for you? Our guide will explore the different types of nontraditional loans – and some of their benefits and drawbacks.

What Is a Nontraditional Mortgage Loan?

A nontraditional mortgage is a unique loan that doesn’t fit the requirements of a conventional loan or an unconventional loan. Nontraditional mortgages often have lower credit score and debt-to-income (DTI) ratio requirements. 

These mortgages tend to have unusual repayment terms and may allow borrowers to defer their payments or only pay interest until the end of the loan.

Characteristics of a nontraditional mortgage

Nontraditional mortgage loans usually have these traits:

  • Typically, they have a nonstandard amortization schedule.
  • They have flexible repayment terms.
  • They present a higher risk for the borrower and lender due to their irregular payment terms and lower credit score requirements.
  • They are easier to qualify for than conventional loans.
  • Some borrowers pay higher interest rates.
  • They may offer principal or interest deferral.
  • They are issued by private, nontraditional mortgage lenders, like businesses or home sellers, rather than banks, credit unions or online lenders.

Nontraditional Mortgages vs. Other Types of Loans

With a “traditional” mortgage, also known as a conventional mortgage, the repayment terms are fairly straightforward. You borrow money from a lender at a fixed or variable interest rate. Then you make monthly payments toward the loan’s interest and principal until it’s paid off. After that, you own the property outright.

With a nontraditional mortgage, the repayment terms are a little different to give other options to home buyers who may not qualify for a conventional mortgage. Nontraditional mortgages allow borrowers to throw out the regular payment model in favor of a more flexible repayment schedule.

The alternative repayment schedule can look like only paying interest on the loan, and at the end of the loan’s term, making one large payment on the outstanding loan balance. Or it can look like deferring your payments until the end of the loan when you pay the entire loan balance and its accrued interest. 

Nontraditional or nonconforming?

Nontraditional loans are often confused with nonconventional or nonconforming loans. Nontraditional loans are different from nonconforming loans – but most nontraditional loans are nonconforming. So, what’s the difference? And how can one loan be both?

Nonconforming loans

Nonconforming loans are loans that don’t meet Fannie Mae and Freddie Mac’s standards for purchase, meaning they aren’t conventional. 

However, many nonconforming loans, like Federal Housing Administration (FHA) loans, Department of Veterans Affairs (VA) loans and U.S. Department of Agriculture (USDA) loans, operate like conventional mortgages because of their repayment models and schedules. 

Even though you pay these loans back the same way you would pay back a conventional loan, they’re considered nonconforming because the loans are government-backed and often have lower credit score and DTI requirements.

Nontraditional loans

Nontraditional loans don’t conform to Fannie Mae and Freddie Mac’s standards and don’t have typical repayment schedules. With a nontraditional loan, you may not have to make payments every month. You may only pay interest for a few years – or the entire life of the loan.

Types of Nontraditional Mortgages

There are three main types of nontraditional mortgage loans: balloon loans, interest-only mortgages and payment-option adjustable-rate mortgages (ARMs).

Balloon loans

A balloon loan is a mortgage that operates on a lump-sum payment schedule. That means that at some point in the life of your loan (usually at the end), you’ll have to pay the outstanding loan balance with one larger-than-average payment. 

Depending on your lender, you may make monthly interest-only payments and one big principal payment at the end of the loan, or you may make payments that are a combination of interest and principal, paying off a somewhat smaller lump-sum balance at the end.

With a balloon loan, you’ll have low monthly payments, which can free up money for other goals, like saving or paying off other debts, before you make your lump-sum payment on the loan. Balloon loans can be a good idea for homeowners who know they won’t be in a house for very long or for homeowners who can pay the lump-sum amount quickly and avoid making monthly mortgage payments for years.

Interest-only mortgages

An interest-only mortgage is similar to some balloon loans. A borrower may be allowed to only pay interest on the loan every month rather than pay interest and principal. Unlike a balloon loan, you generally only pay interest for a set number of years with an interest-only mortgage. After that, your balance starts amortizing, which can dramatically increase your monthly payment.

Most interest-only loans are ARMs. With an ARM, the interest rate on the loan is periodically adjusted each year based on current market rates, causing your monthly payments to either increase or decrease. A common interest-only mortgage option is the 5/6 mortgage. The 5 represents the number of years you’d only pay interest, and the 6 indicates that your rate will be adjusted every 6 months.

Interest-only fixed-rate mortgages exist, but they are rare. ARMs can be more expensive long term, so if a rate that is guaranteed not to increase sounds better to you, consider refinancing to a conventional fixed-rate loan.

Payment-option ARMs

A payment-option ARM adjusts every month and allows borrowers to decide how they want to pay down the loan. Borrowers are given several payment options to choose from, including 15-, 30- or 4-year fully amortizing payments, minimum-and-over based payments, and even interest-only payments (which are similar to balloon loans).

Payment-option ARMs can be very high risk to borrowers since there’s a good possibility that your monthly payments will increase and the amount of debt you owe may also increase while you’re attempting to pay down the loan, depending on your rate and how much over the minimum you’re paying each month on the mortgage. 

These loans can be beneficial to buyers working with shorter-term investments but may prove too risky for homeowners in search of a good long-term loan.

The Pros and Cons of Nontraditional Mortgages

Nontraditional mortgages have a reputation for being riskier loans for borrowers, but depending on the situation, they can also be very useful. To see if a nontraditional loan might work for you, let’s review some of the pros and cons.

PROS of Nontraditional Mortgages👍

Flexible payment options

Most nontraditional mortgages allow you to make lower monthly payments – or even pay off your entire principal balance in one lump sum.

Accumulate wealth before paying

One perk of paying your entire balance off at a later date is that it gives you a chance to save money because you’re not making large monthly mortgage payments.

Afford a home faster

With loans like an interest-only mortgage, your mortgage payments are more affordable during the interest-only period at the start of the mortgage than they would be at the start of a conventional mortgage where your payments include principal and interest.

Pay off your loan faster

Nontraditional loans are often short term. With an interest-only loan, if you make payments toward your principal on top of your monthly interest payments, you’ll lower the amount you’ll have to pay at the end of the loan.

CONS of Nontraditional Mortgages👎

Potentially high interest rates

Not all nontraditional loans have high interest rates. But many of them are ARMs, and with an ARM, your loan’s interest rate could increase at any time. And because many nontraditional mortgages have less strict credit and DTI requirements, the rate may be higher to account for the risk of defaulting on the loan.

Greater risk of default

While flexible payment options can be very useful, they can also present a danger for borrowers. With some nontraditional loans, if you only make minimum payments or defer your payments, the interest can build up fast, which will increase the total amount you owe. The more you owe, the harder it may be for you to make your payments when the loan comes due. When that happens, you may be at greater risk of default than you might be with a conventional loan.

Housing prices could fall

If you have an interest-only loan and plan to sell your home before the interest-only period ends but the value of your home drops, you may not be able to sell your house, or you may have to sell the home for less than you owe on the mortgage.

No equity

With many nontraditional loans, the option to only pay interest is great because it allows you to make lower payments – but you aren’t building equity in the home. If you sell your home with little to no equity, you may end up making nothing or even paying to sell.

Are Nontraditional Mortgages a Good Idea?

Nontraditional mortgages offer lower monthly payments, flexible payment options and typically have less strict requirements to qualify than conventional loans, which makes them very attractive. 

These loans can be useful if you need to finance a short-term investment or are in another situation that calls for an (initially) low-cost nonconventional loan. However, these flexible options can pose a risk to borrowers, especially when paired with higher rates.

Before deciding to get a nontraditional mortgage, be sure to do your research and determine whether the loan would be a good option for you even in a worst-case scenario where your monthly payment increases by a lot.

The Bottom Line: Be Careful When Considering Nontraditional Loans

Nontraditional loans are an option for borrowers in need of unique financing to suit their needs, but these loans come with risks you should seriously consider before applying.

For many borrowers, a traditional or conventional loan may be a better, more affordable option. 

Take the first step toward buying a home.

Get approved. See what you qualify for. Start house hunting.

You Should Also Check Out…