Buying a home is exciting, but you must know the difference between qualifying for a loan and affording a loan. Just because you qualify for it, does not mean you can afford it in reality. This is especially true for non-QM loans that may have slightly different terms, higher rates, and/or higher fees. Before you jump in feet first, learn the differences and what you should look for so you can minimize the risks of defaulting on your mortgage.
Qualifying for a Home Loan
Qualifying for a QM loan is different than qualifying for a non-QM loan. The main difference is the debt ratio maximum allowed on the loan. If your debt ratio is higher than 43%, you are typically pushed into the non-QM bracket. This does not mean you do not have a maximum debt ratio if you are pushed into the non-qualified loan category – lenders will still require you to have responsible use of your money and available credit, otherwise it would be a high default risk as well as not meet the Ability to Repay requirements set forth by government agencies. Lenders still have to do their due diligence regarding verifying whether or not you can pay for a loan. No matter how low your debt ratio is, if you don’t have the ability to pay the loan, you are not going to pay it. Lenders need to verify your employment, income, and assets are in fact what you state they are in order to qualify.
What is your Comfort Zone?
Maximizing your debt ratio is a dual effort; you must play a vital role in it. Every lender has their own maximums depending on the loans they currently have in their portfolio or what their investors will allow. There is not hard and fast number to throw out there – you may even find a lender that will go all the way to a 50% debt ratio, but chances are he will require a variety of compensating factors, including many months of reserves in order to allow that. Just because a lender is willing to offer a loan with a high debt ratio though, does not mean you need to take it. You need to figure out what you are comfortable with before you sign for any loan. Let lenders (several if you are shopping around) let you know how much loan you qualify for and then go from there. Take a close look at the cost of the loan now as well as over the life of the loan. Is it something you are willing to live with or should you pare down the payment a little bit? If you are shopping for a house, it is best to do this part ahead of time so that you know exactly what you can afford before you fall in love with a house that might be slightly out of your price range or would make your payment higher than you are comfortable with having every month.
Income Requirements for Non-Qualified Mortgages
Non-QM loans are just like QM loans in terms of verifying your income. You will need to provide ample paperwork to prove your income as well as go through an employment verification process. Lenders need to double and triple check that every figure you provide is true. If they don’t, they run the risk of being sued down the road as that was part of the reason of the mortgage crisis that occurred a few years ago.
Verifying your income means providing certain documents such as:
- Your last 2 paystubs
- Last 2 years’ worth of W-2s
- Asset statements going back 12 months
- A verbal and/or written verification of employment from your employer
- Tax returns for the last two years if you are self-employed
- Letter from your CPA that handles your self-employment income
There are no exceptions to verifying your income whether you are obtaining a QM or non-QM loan as both types of loans are required to meet the Ability to Repay Rule. There is no such thing as a stated income, stated asset, or no doc loan any longer – everything must be verified. But again, this does not mean that whatever you qualify for is what you can afford. Things look much different on paper than they do in real life. In addition, you need to determine the amount of your other expenses, meaning those expenses that do not report on the credit report, but that you must pay month after month. These costs could include school tuition, groceries, gym fees, activity fees for children, daycare, or any other fee you pay on a monthly basis.
The fact that non-QM loans are readily available from a variety of lenders today is exciting, but it does not mean you should jump at the chance to take it before analyzing your financial situation. If you are coming off of a bankruptcy or foreclosure, it can be thrilling to be able to get into a loan, but it might not be the best choice for you at the moment. Make sure to really weigh the pros and cons of each loan you are given access to before closing on it. A non-QM loan is a great opportunity for those that are not quite out of the woods when it comes to repairing their credit or those that have become self-employed because there were no other jobs available, but it should not be taken lightly.
Determining the affordability versus what you qualify for can mean the difference between defaulting on a loan and being able to keep your home. In the end, a little more legwork can help you determine the right choice for you. Don’t forget to shop around with a variety of lenders to ensure you are getting the best deal regarding the terms, rate, and fees on your loan as every lender offers different programs and costs, giving you many choices when it comes to home ownership.