A non-qualified mortgage is any home loan that fails to comply with the Consumer Financial Protection Bureau’s (CFPB) existing rules on qualified mortgage. For a person to get a mortgage, he should have a steady employment record. This requirement suppresses the borrowers who have seasoned jobs or are self-employed. Good thing they can apply for non-qm loans.
Individuals who have young businesses experience a hindrance of getting a mortgage because they cannot prove steady income for the past two years. The mortgage lenders will feel uneasy of offering such an individual mortgage because of the shift in employment.
There are several rules established that protect the borrower and the lenders – hence individuals taking mortgages. This rule institutes some qualifications which protect lenders and borrowers from the repercussions of default. These requirements include that if a mortgage does not have the following, then it is non-qualified:
- Points should not exceed 3 percent of the loan
- A DTI ratio not exceeding 43 percent
- Proof a standard income
- Have a standard repayment
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Non-qm loans also abide by the Ability to Repay Rules even though it may seem unfair to a business person. This ensures that the income of the borrower, employment, and credit history are verified. Still, the lender ensures that a borrower has the capacity to repay the money he owes.
The problem with history
A common deterrent to loan approval for newly self-employed individuals is the lack of income history as the foundation for the loan. When individuals begin their slate, the likelihood of him having a short income history is high. Lenders look for a positive possibility from the income so that they can give a mortgage.
A person can ensure that he has a positive feedback by doing either of the following:
- Showing non-delinquent payments since he became self-employed.
- A person can decide to partner with someone who is more experienced in the industry
- Opening a business within the same industry that one was previously working for.
- One can also show the availability of financial reserves which will cover him when the business fails.
For individuals to make up for the risk, they will require compensating factors. Compensating factors are things that make up for the facts of the non-qm loans. They include the following:
A High Credit Score
A good credit score is the lender’s first impression of financial responsibility. Individuals with high credit score show lenders that they can handle all finances through paying bills on time.
A Low Debt Ratio
A low debt ratio equals the lower risks of default. When a lender sees that you do not have outstanding debt, he will be contented since there will be income to cover the mortgage payment
Assets on Hand
Approval chances of a mortgage are high when borrowers have available money after paying the closing costs. Lenders refer to this money as reserves. The more the reserves, the better chances of approval.
There is not much difference in a non-qualified mortgage as a borrower. One might pay higher interest rates and hence a borrower should shop around for other affordable lenders. Applying for non-qualified mortgage loans is an alternative way to verify that a borrower can afford mortgages.
Non-QM loans are offered to self-employed individuals based on their ability to pay. The credit history and income documents are used to determine whether an individual is eligible for a loan or not.
There is little paperwork required to process a non-qualified mortgage loan. And there are several alternatives you can choose to gain the confidence of the lender. One option is to verify your bank statements. Others include providing tax forms and pay-stubs and other financial documents.
For ease of payment of your loan, you can opt to extend the payment period up to 40 years. With Non-QM loans, there is no pressured to pay the loan in huge lump sums. This mode of payment is favorable to self-employed individuals or seasoned employees as it allows them to manage their payment without much strain.
As a self-employed individual, a Non-QM loan does not burden you with private mortgage insurance (PMI) policies. Borrowers need not pay extra money which is usually attributed to the possibility of an individual defaulting their payment. Non-QM loans are convenient as they eliminate additional costs, saving you money that you can use for other business. You should, therefore, consider taking this loan to build yourself a home as it is the best in the mortgage industry.