Buying a home is a big deal. For some, it’s the fulfillment of a lifelong dream. Many of those who don’t have traditional income might feel like getting a mortgage loan. Luckily, there are options for those who don’t qualify for the standard, qualified loan.Non-qualified mortgages are getting more attention and overcoming a bad reputation from the past. Whether you’ve heard of non-QM loan before or you’re considering it for the first time, it’s important to consider who is the best candidate for these non-traditional loans.
Qualified loans are what most people consider a traditional loan. The rules and policies for qualified loans came after the housing crisis in 2008. The Consumer Financial Protection Bureau decided to start to maintain strict guidelines regarding mortgages.
The housing bubble brought to light many issues in the former way loans were given to home buyers. The fallout was a massive crash in the housing market that impacted millions.
To ensure that lenders are mitigating their risk, qualified loans want to ensure that borrowers are able to pay back their loans. There are four main components:
The rule regarding being able to repay requires lenders to document your income, employment, monthly debts, and assets before approving your loan. It might seem like an intrusive look into your finances, but this evaluation is meant to determine your ability to repay.
Under this rule, lenders are prohibited from using risky loan features. Some of these risky features include loan terms that exceed 30 years and interest-only mortgages. These features are considered to have higher risks when compared to traditional loans.
If a borrower is getting a loan over $100,000, the lender can’t assign fees over three percent of the loan.
Banks use a formula known as the debt-to-income ratio (DTI). This formula produces a percentage that indicates a percentage of all of your monthly debts divided by your pre-tax monthly income. A qualified mortgage loan requires a DTI of 43% or lower. Some lenders, however, can allow up to 50%.
The easiest way to describe a non-QM loan is any loan that doesn’t meet the standards of qualified mortgage. Lenders who offer non-QM loans have more flexibility in how they approve loans.
Lenders still have to assess the borrower’s ability to repay the loan, but they can make these decisions based on other information. Lenders can look at bank statements, multiple income streams, and other documentation to determine if a person is able to repay their loan.
Some people view non-QM loans as a bad thing. In reality, non-QM loans are just different and attract different kinds of people. Here are some of their most common types:Interest Only Loans
People who are looking to keep a healthy cash flow often love interest-only loans. That cash flow could be used to make repairs that will help sell the house for a profit. Since the owner is looking to sell as soon as possible, paying a smaller mortgage payment is ideal.Stated Income Loans
Some borrowers don’t have traditional tad returns or W2s to showcase their income. In these cases, they can submit an estimate of their income backed by bank statements or other documents.Verified Assets
Even if a borrower doesn’t have a significant income, they may have sufficient assets to cover mortgage payments. In this case, the lender doesn’t look at only the borrower’s income. They will, however, verify said assets.
If you own your own business, you might not have regular paychecks. That’s not to say that everyone who runs their own company can’t qualify for a traditional qualified loan. Many companies, new ventures, and small businesses don’t make money in conventional ways.
That might because the industry is seasonal or made up of multiple income streams. In many cases, looking at your entire income helps paint a complete picture of your ability to repay the loan.
Borrowers who use non-QM loans can use their cash flow and liquid assets to prove their ability to repay. Bank statement loans are popular among the self-employed because they are based on your average cash flow over a period of time rather than a W2.
There is an entire industry around purchasing property in order to make a profit. Whether these individuals plan to flip and resell the house or use it as a rental property, their needs are very different than someone looking for a primary residence.
Real estate investors might accept non-traditional terms in order to make a quick turnaround on a property. A mortgage that lasts over 30 years isn’t a problem if you’re hoping to sell the house right away.
Real estate investors have a different amount of pressure to showcase their ability to repay the loan. An investor with a history of flipping houses may have an easier time getting approved than someone just starting. Those looking to rent out the property, rental income is considered as a way to pay back the loan.
Non-residents can often find it challenging to obtain a loan, especially if they haven’t been in the United States long enough to establish and build credit. A traditional lender would rarely consider someone without the proper credit score, let alone someone without a rating at all.
Foreign nationals can use international credit reports and letters from previous lenders to help establish credit. It’s also common for foreign nationals to pay larger-than-normal down payments to obtain a non-QM loan.
Some borrowers might be able to apply for a traditional qualified mortgage, but they are interested in riskier loans. Since qualified mortgages aren’t allowed to offer certain kinds of loans, the non-QM route might be the only way to go for certain loans.
For example, if someone wanted to deal with a mortgage that lasts more than 30 years, or prefers an interest-only mortgage for some reason, there are still options.
Is a Non-QM loan right for you? Contact us today to find out!