Non QM Loans
WHAT ARE NON-QUALIFYING (QM) MORTGAGE LOANS?
A Non-qualified mortgage loan is often referred to more commonly as non-QM loans. The mortgage that meets the criteria set forth by the Consumer Financial Protection Bureau (CFPB) and the standards established by the federal government is known as a qualified loan. These loans include loans that are sold or insured by Fannie Mae and Freddie Mac. Every borrower is not a good fit for a traditional government matrix. Oftentimes it is difficult for investors, foreign nationals, and self-employed borrowers to get a conventional loan, and a Non-QM loan may be a solution in these situations.
Non-QM loans, also known as non-qualified mortgages, allow you to be qualified for a mortgage loan based on other methods instead of the traditional income verification required by most loans. Examples include using bank statements as collateral or using assets as collateral. Non-QM loans offer real estate investment opportunities for a broader range of people because they have many flexible qualifications.
Non-QM loans can help borrower realize their American dream of homeownership. These are situations that do not meet federal requirements for traditional or qualified mortgage loans. Non-QM loans have different underwriting guidelines to conventional or government-backed loans. Non-QM loan lending guidelines are regulated and consider the borrower’s ability to repay (ATR) according to the terms, including cash flow from personal or business bank accounts.
Non-qualified mortgages (non-QM loans) do not meet the requirements of the Dodd-Frank Act. These mortgages may be available to applicants whose incomes are not consistent from month to month or who have other unique circumstances.
A lender might not approve you for a qualified mortgage if your DTI is higher than 43%. You may also not be eligible for a qualified mortgage if your income is irregular and you do not meet all the requirements of the Dodd-Frank Act.
An alternative here is for a lender to offer you a non-qualified (non-QM) loan. A lender may provide you with a non-qualified mortgage. However, they will still need to verify your ability to repay the loan.
The top three reasons borrowers look for a non-qualified mortgage are:
- Limited documentation
- DTI higher than 43%
- Interest-only loans
Lenders will vary in their interest rates, but you might find that a non-qualified loan will have a higher rate.
The essential requirement for mortgage lenders is to be sure you can repay your loan. These regulations protect buyers from taking out risky loans. These minimum requirements for qualified mortgages form part of the Dodd-Frank Wall Street Reform Act and the Consumer Protection Act, 2010.
Non-QM loans first originated in 2018 and did not fit into the QM box for three reasons: limited or alternate documentation, DTI over 43%, and interest-only loans. Nearly 46% of non-QM borrowers were above the 43% DTI threshold. Forty-four percent used minimal or alternative documentation, and 13% were interest-only loans.
The share of non-QM loans above 43% DTI threshold increased more than threefold in 2018 over 2014. Some of the more risk factors, such as balloon payments and negative amortization, have disappeared completely.
Non-QMs today are of high quality. They are safer and more advanced than their pre-crisis counterparts. The average credit score in 2018 was 760 for homebuyers without QMs, compared to 754 for those with QMs. The average first-lien LTV of borrowers was 79% with non-QMs, compared to 81% for QM borrowers. The average DTI of homebuyers without QMs was lower than that of borrowers with QMs.
Non-QMs perform exceptionally well despite having DTI ratios higher than conventional QM loans. In 2018, both QM conventional loans and non-QM conventional loans had low default rates. The non-QM conventional loans had a lower severe delinquency rate than those for QM conventional loans.
To offset the increased risk of high DTI, down documentation, and interest-only non-QM loans, lenders use high credit scores and low LTV.
- QM regulations went into effect in January 2014.
- QM regulations were used for the identification of non-QM equivalent loans before 2014.
- Only conventional loans that had valid values for the variables required to identify QM loans were considered.
- DTI “non-QM equivalent” is likely to be too low in 2005-2006, or it may not have many high DTI observations.
NON-QM VS. QUALIFIED MORTGAGES:
Non-QM loans can be used as an alternative to qualified mortgage loans (QM). A Non-QM loan, on the other hand, is not required by federal and Consumer Financial Protection Bureau (CFPB) guidelines to qualify mortgages requirements.
QUALIFIED MORTGAGE (QM) REQUIREMENTS:
It took more than five years for Consumer Financial Protection Bureau (CFPB) to issue regulations to offer consumers safer and more sustainable home loans. These regulations are known as Qualified Mortgages or QMs. Lenders were required to ensure that applicants could repay their mortgages, which is the ability-to-repay (ATR) rule. This Act also requires that QM loans not have risky features such as negative amortization, interest-only, balloon payments, terms exceeding 30 years, excessive points or fees. QM loans must meet the following criteria:
- Borrower’s debt to income (DTI) ratio should not exceed 43%.
- The borrower is ineligible for a loan for purchase, guarantee, or insurance through the Federal Housing Administration, Veterans Affairs of the United States Department of Agriculture, or any government-sponsored enterprise (GSE) regardless of DTI ratio.
- Insured depositories with assets below $10 billion must originate loans, and they must keep the loan in their portfolio for at least three years.
Non-QM is a home loan that does not comply with QM regulations. Non-QM loans are not always high-risk loans. They are simply loans that do not conform to the QM guidelines. Non-QM loans include interest-only and limited/alternative documentation loans. Non-QM loans must still meet the ATR requirements.
Non-QM is growing by 1% from 2017 to 2018 and representing about 4% of 2018 originations. The non-QM market makes up a small portion of today’s mortgage market. However, it is crucial in meeting credit needs for homebuyers who cannot obtain financing through GSEs or government channels. Non-QM loans are available to creditworthy borrowers who have not applied for GSEs or government-insured loans. These include investors, self-employed borrowers, first home buyers, borrowers with significant assets and low incomes, jumbo loan borrowers, and borrowers who have substantial assets.
To provide stable borrowing requirements, the CFPB established a set of rules for QM loans. These rules are intended to prevent borrowers from signing loan agreements they can’t afford to repay. These regulations were enacted in response to the Great Recession, which lasted from 2007 to 2009. During this period, many borrowers defaulted upon their subprime mortgages. They were forced to foreclose, had a lasting impact on the economy, and damaged many people’s credit scores.
These are the requirements to be eligible for a traditional mortgage:
- Income:You must prove income, including pay stubs and W-2s, as well as tax returns.
- Debt:Your debt to income ratio (DTI) must not exceed 43%, which is your monthly income that goes towards your existing debts.
- Limited Fees: Fees are not allowed to exceed 3% of the loan amount. There are no risky loan features. Negative amortization (where the principal can rise even though you make payments), interest-only loans, balloon payments, and negative amortization pose risks.
- Lender term:Loan term must not exceed 30
Non-qualifying mortgages are for you if you do not meet the criteria.
There are no uniform underwriting standards for non-QM loans. Lenders tend to be more experienced in specific types of non-QM products. Lenders can vary in terms of interest rates and loan terms. CoreLogic data for 2019 revealed the following credit characteristics in closed non-QM loans:
- The average credit score was 756
- The average down payment was 21%
- The DTI ratio of non-QM homebuyers was lower than the DTI ratio of QM homebuyers.
POTENTIAL CANDIDATES FOR NON-QUALIFIED LOANS:
The process of purchasing property can be complicated and lengthy. The situation can quickly become frustrating if you are unable to qualify for traditional mortgages. QM loans may not be your only option.
A Non-QM loan could be the next step if you have been declined for traditional QM loans. If you cannot qualify for a conventional QM loan due to your income or credit score, you might consider applying for a Non-QM Loan.
It has been reported that most borrowers fall into one of the following three scenarios, which is why a Non-QM loan is best suited for them:
- Borrowers who are self-employed and have a high-income tax write-off
- Credit problems in the credit department
- Investors are looking to buy vacation homes or rental properties.
The requirements for self-employed borrowers are often more complex than those of traditional wage-earning borrowers. These borrowers may be eligible for a Non-QM loan if they have additional documentation such as bank statements. A recent (2019) study found that nearly 30% of Americans are self-employed. These same Americans will have to submit documentation two years later to be eligible for a loan.
HOW CAN LENDERS VERIFY INCOME TO GET NON-QM LOANS?
Non-QM loans are not qualified to lend QM loans. However, they do not have to be of low quality. CoreLogic data showed that non-QM borrowers had a credit score of 760 in 2018. QM borrowers had an overall credit score of 754. NonQM loans had a 79% loan-to-value ratio, while QM loans had an 80%. However, non-QM borrowers have, on average higher DTI ratios than QM borrowers.
Lenders can offer mortgages to non-QM borrowers with flexibility. However, lenders must still verify the information. They must prove and document everything that can be used to support the borrower’s ability to repay, including income sources. They might also need to verify assets and other information that can give them confidence that the borrower will repay the loan.
Non-QM loans cannot be insured, guaranteed, or backed up by FHA, VA, Fannie Mae, or Freddie Mac.
Non-QM mortgages are often recommended for:
- Self-employed individuals,
- Real estate investors,
- Retirees who are interested in buying a second home but not their primary residence,
- Owners of small to medium-sized businesses,
- Borrowers who are looking for interest-only payments and more flexible DSCR requirements,
- “Subprime” and “Non-Prime” borrowers that barely meet the QM loan requirements but do not want any delay,
- People who have recently experienced a credit event (bankruptcy or short sale, foreclosure, etcetera.)
- Greater underwriting flexibility,
- Personal income calculations are not required,
- In some cases, job history is not required,
- Only 5% down payment,
- In some cases, no reserves are needed,
- Credit scores as low as 620 are allowed (with compensating factors),
- Low debt-service-coverage ratio (DSCR) on investment properties,
- Counting rental income (including Airbnb and VRBO),
- Low credit score buyers can still qualify for a mortgage,
- Requires less stringent income documentation,
- The application process is almost identical to that for qualifying mortgages,
- Non-QM loans offer investors and potential homeowners the best way to realize investment opportunities,
- Real estate opportunities are not always available for long. You can purchase a property quickly with a Non-QM mortgage.
CONS OF NON-QM LOANS:
- Non-QM loans may have higher interest rates and fees,
- It can be harder to find non-QMs,
- Non-QMs cannot be sold to Fannie Mae or Freddie Mac,
NON-QM MORTGAGE RISKS:
Non-QM mortgages are subject to the principal risk of not paying back the loan if your financial situation changes, especially if you are in another economic recession. But, defaulting on any loan is always an issue.
Non-QM loans are flexible and allow borrowers to have a choice.
SHOULD I GET A NON-QUALIFIED MORTGAGE?
If you are unable to qualify for a mortgage, a non-QM mortgage is an option. Imagine you are a freelancer or self-employed. You may make less money in one month, while the income you receive the next month is very high. It is impossible to predict how much income you will make from one year to the next. You do not have any trouble paying your bills, you have a good credit score and money in the bank. Even if your finances are in order but you still are not able to tick off the income verification box to qualify for a qualified mortgage (QM); and this is where a non-QM loan comes in.
A non-QM loan might be beneficial to the following types of borrowers:
- Real estate investor,
- Owner of a business,
- Foreign national,
- A buyer who is dependent on investments or has high assets but low income,
- A buyer with a high debt-to-income ratio,
- Buyers with less-than-perfect credit.
Non-QMs show that mortgages are available to all types of homebuyers. A mortgage can be obtained even if you have poor credit or low income, or high DTI.
Non-QMs are not the same as subprime mortgages, so if you are concerned about their safety, do not be. Non-QMs have been mistaken for bad loans due to the Great Recession. Non-QMs today have their guidelines, just like qualified mortgages. The lending process is very similar, except for the required loan documents. Both types of loans are subject to the “Ability To Repay Rule.” Lenders are not required to prove that a borrower can repay the loan. Non-QM mortgages are as secure as any other mortgages on the market.
HOW TO AVOID GETTING A NON-QM LOAN?
These are steps you can take to increase your chances of getting a qualified mortgage.
- BOOST YOUR CREDIT SCORES: Your credit score can be improved by paying your bills on time and paying off your credit card balances each month.
- FIND A CO-BORROWER: You may be able to meet traditional loan DTI requirements by adding a co-borrower’s income.
- BUILD MORE MONEY: A lower monthly payment and loan amount will be achieved if you pay a higher down payment which could help you qualify to get a standard mortgage.
- GETTING A SIDE HUSTLE: A second job can help you save money for your down payment. You may be able to prove continuous income from a part-time or second job over the last two years, which could count towards your qualifying income.
- QUALIFYING FOR A RENTAL INCOME AND BUYING A MULTI-UNIT HOUSE: If you want to rent out a multi-unit home, you may be eligible for a mortgage. You can even buy multi-unit homes with as little as a 3.5% down payment.
WHERE TO FIND A QUALIFIED MORTGAGE?
Credit unions: Even if you are not eligible for a traditional loan, an outstanding mortgage loan might be available through your closest credit union. Credit unions can issue non-qualified mortgages. Credit unions are less likely than other banks to offer you your mortgage. Also, because you are a member-owner and not just a customer, they may be more open to working with you if you do not meet all the requirements. A credit union has many benefits, provided you are eligible to join. Some credit unions only allow tradespeople; others offer specific services.
Bad credit mortgage lenders: Some lenders will work with those with high credit scores. While you will pay more interest and fees than with a qualified mortgage, it could open up the possibility of homeownership.
ALTERNATIVE TO A NON-QUALIFIED MORTGAGE:
You have other options if your credit score or income is low. Consider an owner-financed property before you abandon your dream of buying a house. You may be able to obtain a mortgage if your situation changes. For example, your credit score will improve, or your DTI will drop. If this happens, you should look for homes that are available for financing. It works like this: You and the owner agree on terms such as how long they will act as a lender and what interest rate you will pay. Instead of making monthly payments to a lender for your mortgage, you make a down payment. However, the previous owners will pay you. If you default on your loan, the previous owner may take over your home.
There are risks involved in owner finance arrangements. They usually include a balloon payment, which is due three to five years later. You can then apply for a traditional loan and use the money to pay off the previous owner. After the former owner has been removed, you will make your monthly payments towards the new lender.
You can rate-shop the current mortgage rates to find the best mortgage for you if you are looking for a non-QM loan. It can save you thousands of dollars by taking the time to search for the right loan.
QM loans are only available to mortgage lenders that can qualify mortgage borrowers. They must also assess the borrower’s income, assets, and monthly debt payments to determine if they can repay the loan. Real estate investors must meet the strict requirements of the Consumer Financial Protection Bureau to be eligible for a QM loan. The approval process involves submitting extensive documentation about borrowers’ credit history, income, and monthly debt payments, which can take well over a month.
Suppose your investment property requires a fast turnaround and doesn’t have to follow strict guidelines. In that case, a NON-QM loan may be a better option, meaning that non-QM lenders, such as Stratton Equities, can offer faster service and approve more types of real property investment opportunities.
Non-QM lenders recognize that life happens and that some real investors might not be qualified for loans from traditional lenders (like banks), which could be because of your income, employment status, credit history, and liquid asset requirements. Private lenders, however, focus on high credit scores, investing experience, and liquid assets when granting non-qualified mortgages.
A NON-QM mortgage program, a non-qualified mortgage program, has a maximum LTV of 85% and no PMI, which is in contrast to conventional investment property loans, which can only go up to 70% LTV, which allows the borrower less down payment on their purchase.
These mortgages are suitable for real estate investors because they have no restrictions.
- Self-employed Investors:We understand how hard it can be to get a steady income, especially in light of COVID-19’s unprecedented year. Todd Uzzell, our chief financial adviser, is here to listen to all your financing issues and provide you with the best financial advice.
- Foreign nationals:Government-backed loans usually require proof of a US social security number or W2 (a US tax return). These requirements are unnecessary for NON-QM loans, which are great for foreign nationals visiting the States with a visa to invest.
 DTI for “non-QM equivalent” is likely too low in 2005-2006 or missing many high DTI observations.
 QM regulation went into effect in January 2014.