Traditional lenders who offer conforming loans are extremely competitive. They must offer desirable terms or lose their share of the market. Meanwhile, hopeful home buyers who are rejected because their needs or credit imperfections fell outside of the guidelines established by "Fannie Mae" or "Freddie Mac" for conforming loans, often turn to mortgage brokers and other specialized mortgage lending businesses who offer alternative or non-conforming loans. Because it's far more difficult to sell non-conforming loans to the secondary market, the cost of these loans to the consumer is greater.
Alternative lenders not only offer a variety of loan products, but are more willing to deal with higher debt-to-income ratios, credit problems and other black marks on an individual's credit history. In cases where negative information on a credit report may be due to disappear in the next few years, or a borrower expects their income to increase significantly, non-conforming loans without excessive prepayment penalties can be excellent. However, because these borrowers may be desperate for a loan, the non-conforming loan market makes it easy for unscrupulous "predatory" lenders to deceptively convince borrowers to agree to unfair and abusive loan terms.
Proponents of non-conforming loans stress that the borrower can obtain a conventional loan as soon as they qualify, yet enjoy the benefits of home ownership and establish equity in the meantime. Many home buyers engaged in this process are grateful for a second chance. Yet no one should be so anxious that they sign for a loan with questionable terms.
Opponents criticize the non-conforming sub-prime lending industry for predatory practices such as targeting borrowers who do not have the resources to meet the terms of their loans over the long term. These criticisms have increased since 2006 in response to the growing crisis in the U.S. sub-prime mortgage industry, wherein hundreds of thousands of borrowers have been forced to default, and several major sub-prime lenders have filed for bankruptcy.