Non - QM Loans
What are Non-QM Loans?
Non-QM loans are great for potential homebuyers who don’t meet the standard loan requirements. Generally, these loans can help individuals who are investors, self-employed, foreign nationals, or who have had a recent derogatory credit event such as bankruptcy or foreclosure and cannot qualify for traditional financing. Non-QM loans emerged when a government organization called the Consumer Finance Protection Bureau (CFPB) created regulations that lenders have to follow if they want to approve a loan.
Non QM Loans have been rising in popularity after the mortgage industry recovered from the shock of the 2008 housing collapse
There are many different ways to obtain your mortgage. One of the most common ways is to consider a government -backed agency loan with the FHA, VA, or USDA. A loan obtained by a government-back agency is a loan subsidized by the government; these loans protect lenders against defaults on payments. A government agency loan is considered a Qualifying Mortgage or QM Loan. A Non-QM Loan is funded through private organizations and/or investors who use guidelines that fall outside of the scope of regulations established by the CFPB. Often times these borrowers will have to prove an ability to repay using alternative qualifying guidelines. If you are someone who has been denied approval for a mortgage because of your unique circumstances read below to see if a Non-QM Loan is right for you.
What are QM Loans?
QM Loans or Qualifying Mortgages satisfy the ability to repay rule and are secured by government-sponsored enterprises like Fannie and Freddie. An example of a QM product is a Conventional, FHA, VA or USDA loan.
- No IO, balloon payments or negative amortization
- Maximum 30 year term
- Points and fees cap of 3% for loan amounts that exceed $100,000
- Maximum Debt to Income Ratio of 43%
- Lender verifies income and assets in accordance with “Appendix Q”
Can I Buy a Home if I’m Self Employed?
Sometimes self-employed borrowers can’t provide traditional income documentation required for QM loans. Good news is A Non QM loan allows the borrower to use bank statements, asset documentation, or year to date profit and loss statements for qualifying income.
When applying for a Non-QM bank statement loan, you may need to provide documentation that you have been self-employed for at least two years. You may also need to provide either 12 to 24 months of bank statements to have the liquid assets reviewed for income eligibility.
Documents You’ll Need With a QM Loan
- Two Years Tax Returns
- Two Years of W-2’s showing consistent income and employment
Documents You’ll Need With a Non-QM Loan
- One to Two Years of Bank Statements
- A year to date profit and loss statement
Are Non-QM Loans for Real Estate Investors?
Non-QM loans are a great option for investors who are taking their portfolio to the next level. QM Regulations restrict investors from having over 10 financed properties. This immediately disqualifies an investor from obtaining financing for additional investment properties. That’s why many real estate investors consider Non QM loans because they want the opportunity to invest in more than 10 investment properties. Non-QM loans can provide these options as some Non QM lenders allow 20, 40 or more financed properties. While they still have to qualify the borrower by proving an ability to repay, they also have options to use alternative qualifying programs such as banks statements, asset depletion, and stated income programs.
Are Non-QM Loans for Borrowers with Derogatory events?
Just because you have been delinquent does not mean you’re ineligible for a mortgage. If you have had a foreclosure, bankruptcy, or other significant marks against your credit, this is called a derogatory event. There is a seasoning period after a derogatory event, which disqualifies you from obtaining a government or agency loan. A seasoning period is the amount of time you have to wait before you are eligible for a QM Loan. Depending on the event, the seasoning period could be between 2 to 5 years. A Non-QM Loan can shorten the seasoning period after a derogatory credit event allowing you to purchase a home much sooner even if you have had a foreclosure or bankruptcy.
Can Non-QM Help a Foreign National Borrower?
Often times Foreign Nationals have limited documentation and can’t meet conforming guidelines. With a Non-QM loan, they may be able to purchase property in the United States. With a Non-QM product you may qualify for a 2nd home or investment property if you are a foreign national. To achieve this, you will need to provide documentation to your lender disclosing your income, assets and credit. An ITIN number will be required and you must have an acceptable VISA or other alternative documentation may be required to qualify as well.
Does a Qualified Mortgage Cost More Than a Non-Qualified Mortgage?
A Qualified Mortgage will often come with a lower interest rate and requires a lower down payment. While a Non-Qualified mortgage creates alternatives to conventional financing, it can come with additional costs. A Lender will often times also require additional financial reserves in order to make sure the loan is not a liability. Not all Non-QM loans are the same, but if you are not eligible for a QM product, a Non-QM loan may be an option but it will have more expensive features due to higher risk.
What are the Benefits of a Non-QM Loan?
- Two Years Tax Returns
- Two Years of W-2’s showing consistent income and employment
What are the Benefits of a QM Loan?
A QM Loan would be ideal for someone looking to get the most competitive deal possible on their mortgage. If you’re trying to use a government program such as FHA, VA, or USDA you will need to meet the underwriting guidelines for a QM Loan. From a lender’s perspective, a QM loan is a trusted product and from a buyer’s perspective, it gives you opportunities for lower down payments and interest rates. A QM Loan would be most beneficial for first time homebuyers, borrowers with higher credit scores and stable income and assets, or those seeking a traditional mortgage.
- Lower Interest Rates
- Lower Down Payment
- Able to use a FHA, VA, and USDA program
How to Get Approved For a Non-QM Loan?
Despite the fact that Non-QM loans do not satisfy QM guidelines, it does not mean that obtaining approval is much different. Applying for a Non-QM loan takes a similar number of steps. Potential borrowers will still need to prove their ability to repay. Often times getting approval means meeting other types of qualifying standards allowed using bank statements or asset documentation.
Why Non-QM Lenders?
Although strict government regulations have declared these borrowers are risky investments, Non-QM lenders will not give up on a borrower if they offer a loan feature that could help them. They understand that a borrower who may not traditionally qualify can still prove their ability to repay. Instead, they will consider that you apply for a Non-QM product. These lenders are looking to create more opportunities in the market for home ownership. This opens opportunities for the lender, but for the borrower as well. There are over 15 million Self Employed individuals in the country, so it seems obvious that there is a market for Non-QM Products.
Non-QM Lenders still take origination and qualifying seriously while looking at the entire financial profile. They will measure a potential borrower by different risk qualifications. From a borrower’s perspective, Non-QM loans have a lower risk rate because once they meet traditional finance guidelines borrowers usually refinance out of a Non QM loan into a QM loan for a better rate and loan program.
On Q Financial is amongst a handful of lenders who offer Non-QM products. At On Q Financial we do it because we believe that the dream of homeownership is inclusive.
The History of QM
I’ll take you back before the housing crisis. Subprime loans were being originated with minimal qualifying standards. The market was booming, sellers were profiting, some millions, and others were buying without enough income: foreshadowing delinquency. Then after 2008 and the bailout we began to see some changes.
The huge mortgage lenders Fannie and Freddie were deemed “To Big to Fail” and were bailed out. The government took possession of the companies and in 2014; under the Obama Administration the Dodd Frank Act was passed.
When the Dodd Frank Act passed through the senate floor, it created a number of agencies and regulations that would protect consumers along with the financial market. These regulations instruct lenders to make “a reasonable, good faith determination” that a borrower is able to repay their loan. These regulations play a tremendously important role in protecting the consumer but also the market as a whole.
One of the agencies created out of this government intervention, in order to enforce the act, was the Consumer Finance Protection Bureau (CFPB). The CFPB protects consumers from abusive and deceptive practices. They will take action against any company that breaks the law. They not only consider legal issues though, they also create tools and information for consumers and lenders
The CFPB regulations act like a safe harbor for lenders. According to the Urban Institute “A QM Loan gives Lenders the highest amount of legal protection from claims the lender didn’t verify a borrower’s ability to repay.” In order to avoid the legal issues associated with underwriting risky products, mortgage companies no longer fund subprime loans. Therefore, negative amortization and balloon payments, which are riskier loan products, are now relics of the past. Non-QM has taken their place and QM has become the new norm.
Under the new regulations, Qualified Mortgages satisfy Ability to Repay rule (ATR). Ability to Repay is something the borrower will have to verify if they want a loan. Your Assets, Credit Score, Down Payment, Income, Debt Obligations, and Employment history will all be weighed together to verify your ability to repay.
Ability to Repay Rule
There are eight underwriting factors that should be considered when a lender is verifying a borrower’s ability to repay.
- Income and assets – How much is your annual income, and will you have enough money to repay the loan.
- Employment Status – Are you currently employed and do you have a 2 year employment history?
- Monthly mortgage payment for the loan – You can calculate this by taking the loan amount times the interest rate and amortize this by the number of months in your loan term.
- Any projected monthly payments on simultaneous loans that are secured by the same property.
- Monthly payments on property taxes, insurance, HOA Fees, ground rent, or any other payments associated with purchasing the property.
- Debt obligations – What debt obligations do you already have?
- Monthly Debt to Income Ratio (DTI) – The conventional rule is that your DTI should be below 43%.
- Credit History – Have you recently gone into foreclosure? If you have recent derogatory credit issues then you may not qualify for a loan.
The Appendix Q is a rule that details the type of documentation a borrower is required to qualify them for a QM product. Despite its highly detailed nature, Appendix Q can be vague. Part of this rule specifies that if a self-employed borrower’s business shows “significant decline” in income it is not acceptable. Many Non-QM Loans originate because a bank statement can be used instead of a tax return and is evaluated in a different manner which does not show declining income.
GSE or QM Patch
The GSE Patch gives borrowers an exemption to the QM Rule, by allowing borrowers with higher DTI’s to still fund their loan through Fannie or Freddie. Essentially this rule says that as long as the loan can be approved through these organizations it overwrites the strict regulations that the CFPB requires.
The Future of Non-QM
The framework for getting a mortgage approved has changed. Immediately post crisis, borrowers with unique circumstances could not have used a Non-QM Program. Today, these loans remain a small percentage of the market, but their growth is impressive. Non-QM credit performance continues to be strong, as delinquency rates remain low. Non-QM loans today are less risky than their subprime counterparts were because a borrower still needs to verify their ability to repay. Luckily, lenders are recognizing the potential of Non-QM. Look at a Non-QM Loan today!