Non - QM Loans
What are Non-QM Loans?
A Non-Qualifying Mortgage or Non-QM Loan uses non-traditional qualifying guidelines that fall outside of the scope of QM Regulations established by the Consumer Finance Protection Bureau. Essentially a Non-QM Loan is not eligible for securitization by any major government agencies such as Federal Housing Administration, Veterans Affairs, or United States Department of Agriculture.
A Non-QM loan is a relatively recent mortgage solution. Non QM Loans have been rising in popularity after the mortgage industry recovered from the shock of the 2008 housing collapse. Generally, Non-QM 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. 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.
Can I Buy a House if I’m Self Employed?
Self-employed borrowers might not be able to document their income using the traditional income documentation calculations required for QM loans. Traditional income documents such as two years of personal and business tax returns, or in some cases a year to date profit and loss statement may not provide the income calculations necessary for a QM mortgage. A Non QM loan allows the borrower to use bank statements for qualifying income. This feature offers more opportunities for the self-employed borrower.
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.
Are Non-QM Loans for Real Estate Investors?
Many real estate investors consider Non QM loans to be able to finance more than 10 investment properties or to use stated income programs. Having over 10 financed properties immediately disqualifies an investor from obtaining financing of additional investment properties when using Conventional Agency QM loan programs.
Are Non-QM Loans for Borrowers with Derogatory events?
Just because you have been delinquent does not make you ineligible for a mortgage. While you may not qualify for a loan underwritten through a government or agency program that does not mean you cannot look into a Non-QM product. There is a seasoning period that has to expire before you are eligible for a QM loan after a derogatory event. A Non-QM Loan can shorten the seasoning period after a derogatory credit event allowing you to purchase a home sooner even if you have had a foreclosure or bankruptcy.
What is a Foreign National Loan Program?
Often times Foreign Nationals have limited documentation and can’t meet conforming guidelines. That does not mean they are not 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.
Does a Qualified Mortgage Cost More Than a Non-Qualified Mortgage?
While a Non-Qualified mortgage creates alternatives to conventional financing, it can come with additional costs. Not all Non-QM Loans are the same, but if you are not eligible for a QM product your mortgage may include expensive features such as higher down payment or interest rates. A Lender will often times require additional financial reserves in order to make sure the loan is not a liability.
What are the Benefits of a QM Loan?
A QM Loan would be ideal for someone looking to get the best deal possible on their mortgage. If you are 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.
What are the Benefits of a Non-QM Loan?
A Non-QM Loan can benefit those who are looking for non-traditional options. Traditional loan options have strict qualifications. Non-QM loans offer programs that can help borrowers who cannot qualify for traditional financing and reviews their qualifications with more flexibility. This gives the opportunity for buyers in need who may be facing unique or unusual circumstances a chance to obtain a loan.
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 approval is any easier. Sometimes it can be more difficult to obtain approval because of the higher down payments, closing costs, interest rates and less attractive loan terms such as adjustable rate loans. Risks, costs, and qualifying features are higher than the QM Loans. Often this means meeting other types of qualifying standards allowed such as bank statement loans, asset depletion loans (income calculated off your assets) or financing with less seasoning after a bankruptcy or foreclosure.
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 homeownership. Creating supply where they see demand. 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. These loans may be offered as an adjustable rate loan. They 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.
What are QM Loans?
QM Loans or Qualifying Mortgages satisfy the ability to repay rule and are adopted by government-sponsored enterprises like Fannie and Freddie. An example of QM products would be Conventional, FHA, and VA loans. In order to understand QM Loans better it is easiest to look at the history of Mortgage Regulations after the housing crash.
The History of QM
I’ll take you back to the wild west of mortgage regulations. Subprime loans were being originated for anybody who had a pulse. 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.
The CFPB regulations act like a safe harbor for lenders. According to 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 have 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 consistent employment history?
- Monthly mortgage payment for the loan– You can calculate this by using the rate and adding it to monthly payments after full amortization.
- 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.
- 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 DTI of 43%
- Lender verifies income and assets in accordance with “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 replace a tax return and 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!
Contact Your Local On Q Mortgage Consultant Today!
Disclaimer: On Q Financial, Inc. is an equal housing lender. Information is subject to change without notice. This is not an offer for extension of credit or a commitment to lend. Some restrictions may apply. Loan approval is subject to applicant’s qualification for a loan program. On Q financial does not guarantee that each applicant will receive a loan. OnQ0114200681Y000007AhTH