Non-Qualified Loan

The Shocking Ways Your Credit Score Affects Your Interest Rate

By

Your credit score dictates your interest rate. In general, the higher your score, the lower your rate. The lower your score, the higher rate you get. Lenders use your credit history and score as a way to determine your risk level. Late payments, collections, and defaulted accounts all decrease your score and make you a high risk.

Get Matched with a Lender, Click Here.

If a lender decides to give you a loan even with a lower score, they need to make up for that risk. Many lenders charge a higher rate to make up for it. They may also charge more fees on the loan. For example, you may pay an origination fee if your score is too low. Lenders use this as ‘prepaid interest.’ It’s money they make upfront. If you were to default, they at least have the money you paid up front to fall back on.

What’s a High Credit Score?

Here’s where things get difficult. There is no cut and dry answer regarding what credit score is considered high. Every lender has a different take on this. One lender may require credit scores as high as 740 in order to secure the best interest rate. Others may allow lower scores. There are no regulations regarding this – it’s literally up to each lender.

How Much Can Interest Rates Vary?

You might not think it’s a big deal to have the ‘best’ interest rate. How much could the rates really vary? In reality, you could see rates differ as much as 1 ½% from the highest and lowest credit scores. Putting that into perspective, let’s look at a $150,000 mortgage.

  • Borrower A has a 740 credit score and secured a 4.5% rate. Her principal and interest payment equals $760.
  • Borrower B has a score of 620 and secured a 6.0% rate. Her principal and interest payment equals $899

That’s a difference of $139 per month or $1,668 per year. If both borrowers kept the loan for the full 30 years, Borrower A would pay $50,040 less than Borrower B. That’s the importance of a good credit history.

What Else Lenders Look at On your Credit History

Your score is not the only thing lenders focus on when looking at your credit report. The score may be the first thing they look at because it lets them know if your file is worth processing. However, once they get past the score, they look at other factors as well:

Click to See the Latest Mortgage Rates.

  • A good mixture of account types – If you have a lot of revolving credit, you might be a higher risk. Lenders like to see borrowers that have a mixture of installment debt and revolving debt.
  • Low balances on your revolving debt – You have credit limits and available balances. If your available balance is too low, it means your credit utilization rate is too high. In other words, keep your credit card balances as low as possible. Aim for 30% or less of your credit line.
  • Age of credit – The older your credit accounts, the better. It gives the lender a better idea of how you handle your credit over a long period. If too many of your accounts are too new it can be hard for a lender to judge your risk level.
  • Number of inquiries – If you have too many inquiries on your credit report, you might have new accounts open. Even though they aren’t on your credit report yet, they still affect your chances of getting a mortgage. Don’t apply for any new credit within a few months of applying for a mortgage for the best results.

Fixing Your Credit Score

What if you find out you have a low credit score? Are you stuck with that high interest rate? Luckily, there are things you can do. First, you must withdraw your mortgage application. Talk to the loan officer to see what score they would like to see from you to give you a better rate. Next, you can set out to secure that score. Here’s how:

  • Bring your payments current – Late payments hurt your credit score a lot. Bring all accounts current and then continue to make your payments on time. The more on-time payments you have, the more your score will increase.
  • Fix mistakes – You might be surprised to learn how many mistakes are on your credit report. Go through it with a fine-toothed comb determining what is right and what is an error. Then set out to fix the errors with both the credit bureau and the company reporting the error.
  • Lower your credit utilization rate – Again, the amount of revolving credit you have outstanding determines your credit score. If your utilization rate is too high, pay some of your debt off and allow your score to increase.

Your credit score has a large impact on your mortgage interest rate. You’ll need to talk to your loan officer to see how your score affects your rate. If you don’t like the rate you are provided, you can do one of two things. You can shop around with other lenders to see if someone else will give you a lower rate. You can also withdraw your application and work on your credit. The higher your score, the better the rate you’ll get, no matter which lender you choose in the end.

Click Here to Get Matched With a Lender.

Understanding the Mortgage Credit Certificate

By

Homebuyers can save money on their taxes with the Mortgage Credit Certificate. This certificate isn’t automatic. It’s something you have to qualify for and purchase. It’s meant for borrowers in the low to moderate income range. It provides you with a tax credit rather than a tax deduction, which provides greater tax savings.

How does the Mortgage Credit Certificate Work?

The Mortgage Credit Certificate entitles the holder to a tax credit up to a 20% of the amount of mortgage interest you paid for the year. You can obtain the certificate no matter the type of mortgage you have – whether fixed or adjustable rate. It is also available on any loan program including Fannie Mae, Freddie Mac, FHA, VA, and USDA.

See If You Qualify for a Mortgage, Here.

The IRS handles the applications for the program. They set the maximum income requirements for the area. Unfortunately, they set one maximum regardless of family size. For example, a family of one will have the same maximum as a family with two working adults. This does make it slightly more difficult for larger families to qualify.

There is an application fee for the program. The fee is non-refundable. If you don’t get approved or you cancel the loan, you forfeit the fee. You can expect to pay between $600-$700 for the certificate.

What do You Get?

If you are approved, you’ll be able to take a tax credit equal to 20% of your mortgage interest paid. Let’s say you took out a $150,000 loan with a 5% interest rate. You’d pay $7,500 in interest. You can take a credit for 20% of that amount or $1,500. This credit comes directly off the income you claim on your tax returns. It directly reduces your tax liability.

Click to See the Latest Mortgage Rates.

You still have the other 80% of the interest you paid. In this case, you have $6,000. You can still use this interest as a tax deduction if you itemize your deductions. This helps lower your tax lability even more. The credit provides a dollar-for-dollar decrease in your tax liability, though. The deduction gives you a percentage of what you paid back.

Increasing Your Income

Some borrowers use the Mortgage Credit Certificate to help increase their disposable income. If you know you’ll decrease your tax lability, you can change your W-4 at work accordingly. You won’t need as many taxes taken out of your check since your tax liability just decreased. Changing your withholding can add money to your monthly checks. You can then use this as a compensating factor when trying to qualify for the loan.

Who Qualifies for the Mortgage Credit Certificate?

Only borrowers buying a home qualify – it is not for refinances. The only exception to the rule is if you are paying off a bridge loan, which is most common with new construction loans. Any type of housing qualifies, either new or existing. However, you must purchase the home as your primary residence. The program is not available to investors or those buying a second home.

Use Caution

Of course, every program has its downsides. Before you apply and pay for the certificate, consider the long-term implications. The certificate is good for the life of the loan. But, think of your long-term plans. Are you going to stay in the home that long? Usually it only pays off if you stay in the home for at least 9 years. However, the longer you stay the better.

Also, pay attention to your actual tax liability. Make sure you’ll make your money’s worth out of the certificate. If you already receive several credits, including the Child Tax Credit, it may not be worth it. Check with your tax advisor before proceeding.

The Mortgage Credit Certificate can be a great way to save money on mortgage interest. If you are a first-time homebuyer, it usually has the greatest impact. As always, check with a professional to make sure it makes sense in your situation. Exploring all of your options can help you make the most out of your mortgage.

Click Here to Get Matched With a Lender.

Take Advantage of the Freddie Mac First Look Initiative

By

Freddie Mac offers owner occupied borrowers and certain non-profit agencies to have first dibs on Freddie Mac owned homes. It’s made possible through the Freddie Mac First Look Initiative. You’ll recognize the homes as they are advertised and sold HomeSteps.

What is the Freddie Mac First Look Initiative?

First, let’s look at the idea behind the Freddie Mac First Look Initiative.

Click to See the Latest Mortgage Rates.

Freddie Mac created the program to enforce some stabilization in specific communities. Right now, the program is available in 10 states. These are homes that Freddie Mac financed, but the owners defaulted. Freddie Mac now owns the properties. They try to sell them to owner occupied borrowers first before marketing the property to investors.

How it Works

The first 20-days of a home’s listing is reserved for owner occupied borrowers or those with a non-profit agency. The agency must be affiliated with a program that promotes community stabilization. Investors can’t bid on the property directly to Freddie Mac during the first 20 days.

You do not need to be a first-time homebuyer. However, you must be able to prove you are buying the home to live in as your own. It can’t be a second home or an investment home. You may see the listing in the MLS, like any other property. Freddie Mac also advertises it on their website. You can search for eligible homes by specific address or search broader with any of the following:

  • City
  • County
  • State
  • Zip code

You’ll see which properties are still in the ‘first look’ phase, where only those planning to live in the property can bid. You’ll also see the properties that are no longer in the ‘first look’ phase and are eligible for bids from anyone.

If you successfully bid on a home within the first 20 days, you must complete an Agreement of Purchaser for Neighborhood Stabilization Non-Profit, NSP, NCST or Government Agency. Fraudulently signing this agreement could result in criminal charges.

Looking for Today’s Mortgage Interest Rates? Click Here.

Using HomeStep Financing

If you bid on a HomeStep home, you may qualify for HomeStep financing. Participating lenders offer this flexible financing option. They offer the following benefits:

  • No need for an appraisal
  • Low 5% down payment
  • No mortgage insurance

Not every home is eligible for HomeSteps financing. Your listing agent can inform you if the Freddie Mac First Home Initiative Home is eligible or not.

Making an Offer

In order to make an offer on a Freddie Mac First Home Initiative Home you need to work with an approved real estate agent. You can find approved agents directly on the HomeSteps site. You should take your time choosing an agent, though. You’ll want someone experienced with the process so you are able to successfully buy the home you want. The real estate agent plays a vital role in the process of you getting the home.

Secure Preapproval

As with any loan, you should apply for loan preapproval first. Whether you use the HomeStep financing or other options, knowing what you can afford will help you bid the right price on a home.

When you have the preapproval handy, you can get through the process faster. You only have 20 days to complete the process. If more than 20 days pass, bidding on the home opens up to anyone, not just owner occupied borrowers.

If you are looking for a home to use as your primary residence, take advantage of the Freddie Mac First Look Initiative. You don’t have to use the HomeStep financing. You can use your own lender and type of financing, if you wish. It just gives you the first advantage at securing a low purchase price on a foreclosed home.

Click Here to Get Matched With a Lender.

Is it Worth it to Buy a Home With Cash?

By

Buying a home in cash means you have to come up with a lot of money at once. Does it make sense to part with hundreds of thousands of dollars at once? Or should you take out a mortgage and gradually earn ownership in the home?

Both scenarios have advantages. If you have the money, though, paying cash definitely has its benefits. Read on to learn how you can benefit from buying your home outright.

Negotiate a Lower Price

Sellers in a hurry to sell their home may be willing to cut you a discount. The fact that they don’t have to wait for your bank’s approval is worth its weight in gold. Financing can slow down the purchase process by weeks, or even months in some cases. If the seller knows they can close on the desired date without worry, they’ll usually jump at the chance. This gives you greater negotiating power, allowing you to pay a lower price for the home.

Pay Fewer Closing Costs

Closing costs can easily add up to 6% of your loan amount no matter which lender you use. On a $300,000 loan, you could pay as much as $18,000 in closing costs. This is separate from any money you put down on the home too.

Click to See the Latest Mortgage Rates»

Cash buyers don’t have nearly as many costs to pay. There aren’t any lender fees to pay, which can save you a lot of money right there. A sampling of the costs you may avoid are:

  • Origination fees
  • Discount points
  • Underwriting fees
  • Application fee
  • Credit reporting fee
  • Escrow fees

You also won’t have to set up an escrow account for your real estate taxes or homeowner’s insurance. This can save you thousands of dollars.

In fact, you won’t even have to pay for an appraisal. Mortgage lenders require an appraisal to make sure the home is worth enough for them to fund a loan. When you pay cash for the home, the risk is yours. It’s up to you if you want to pay for the appraisal or not. They often run around $400.

Lastly, you won’t have to buy title insurance, at least for the lender. When you take out a mortgage, you are required to pay for title insurance to protect the lender against any issues regarding ownership in the future. Most buyers also purchase an owner’s policy. It’s up to you if you want to pay that expense though.

Win a Bidding War Faster

Sellers often pay more attention to cash buyers than those with a mortgage. As stated above, financing can slow the process down or even kill it altogether. When you pay for the home yourself, you don’t have those worries. This can work in your favor if there is a bidding war on the home. When several people want the home, they will often do whatever they can to sweeten the deal. This usually means outbidding the other buyers. But sometimes money doesn’t do the trick. You may even bid a lower amount, but offer to pay cash. Sellers often jump at this opportunity.

The Home Costs Less

No matter the actual cost of the home, you’ll pay less for it over time. If you take out a mortgage, you pay interest. Let’s say you take out a 30-year loan, that’s 30 years of interest. This could mean thousands and thousands of dollars that you save.

You Can’t Lose the Home

Finally, when you pay cash for a home, it’s no one’s collateral except your own. There isn’t a lender that can take the home from you. When you take out a mortgage, your home is collateral. If you miss too many payments, the lender can start foreclosure proceedings on your home. When you pay for the home upfront, though, there aren’t any worries of this happening.

Paying cash for a home isn’t for everyone. Obviously, you need a lot of money to do so. If you have it though, it can benefit you now and in the long run. If your money is sitting in an account not making very much interest, it may make more sense to pay for your home all at once. This way you have 100% equity in the home. Should something happen down the road, you could sell the home and get your money. It’s a win-win situation for you!

Click Here to Get Matched With a Lender»

The Lowest Deposit You Can Put on a Home

By

You are ready to take the plunge and buy a home. You’ve heard the minimum deposit allowed is 20%. What if you don’t have that? Are you stuck renting for the rest of your life? Luckily, the answer is no. there are many factors that play a role in this answer, though.

We’ll explore each of these below.

No Deposit Required

Wouldn’t it be nice if you could find a loan program with no deposit required? Luckily, you can. The USDA and VA both offer programs with no down payment. In order to qualify, you’ll have to buy a rural property if using the USDA program. The VA program is reserved for those that served our country. If you fall into either category, you’ll enjoy the superior benefits of these programs.

Click to See the Latest Mortgage Rates»

The USDA program has flexible guidelines along with the no down payment requirement. In fact, the program is for borrowers with low to moderate income. You can make too much money and not qualify for the program. You can see the USDA’s income guidelines here. Aside from the income requirements, you must also purchase a home within the USDA’s rural boundaries. You can view the eligible properties here.

Veterans also have the benefit of a no down payment program. In order to qualify, you must serve the appropriate time:

  • 90 days during wartime
  • 181 days during peacetime
  • 6 years in the National Guard or Reserves

If you meet the eligibility requirements, you’ll receive a Certificate of Entitlement. This gives you the right to buy a home with no down payment. Just like any other loan, though, you’ll need to qualify personally. For the VA loan, you’ll need a 620 credit score and a debt ratio no higher than 43%. The property must also pass the VA appraisal requirements.

Low Deposit Required

If you don’t qualify for one of the above no down payment loans, you have other options. Low deposit loans are the next best option. The most common is the FHA loan with a 3.5% down payment requirement. This loan doesn’t have maximum income or service requirements. It’s not just for first-time homebuyers either. As long as you meet the credit and income requirements, you may be eligible for the loan.

In order to be eligible, you’ll need at least a 580 credit score. You’ll also need a debt ratio that doesn’t exceed 31% on the front end and 43% on the back end. Lenders will also look for a decent credit history with no collections or other negative credit events in the recent past.

Some borrowers also qualify for a low down payment conventional loan. The down payment is slightly higher than the FHA loan, though. Conventional loans usually require a 5% down payment. In order to qualify, though, you’ll need exceptional credit and low debt ratios. Conventional loans generally have stricter requirements than FHA loans. However, they become even more restrictive with a low down payment.

Whether you take out an FHA or conventional loan with a low down payment, you’ll need to pay some type of mortgage insurance.

The FHA loan requires 0.85% annual mortgage insurance for the life of the loan. On a $200,000 loan, this means $142 per month or $1,700 per year. Your lender pays the insurance on your behalf on an annual basis. They then charge you 1/12th of the amount per month. The amount you pay decreases slightly each year as you pay the principal balance down. FHA MIP never expires. You pay it for the entire time you hold the loan, no matter your loan-to-value ratio.

Conventional loans also require mortgage insurance, but it’s different than the FHA loan. The amount you pay depends on your loan-to-value ratio and term of the loan. The longer you borrow the money, the higher percentage you pay. The difference between PMI and FHA MIP is that PMI can be canceled. By law, the lender must cancel it once you owe 78% of the value of your property. You can also request cancellation if you know your home appreciated or you paid the principal down enough.

Do You Ever Need 20% Down?

It might seem like you can get away with a low deposit with the large variety of loans available. Not everyone qualifies for these programs, though. In general, you need fairly good credit for these programs. The exception to the rule is the VA and USDA loans, but only certain people qualify for those programs.

Borrowers that don’t fall within these parameters may need a larger down payment. Conventional loans, as well as subprime loans, may be available, but for a higher down payment. Just how much you must put down depends on the lender and your parameters. Generally, the lower your credit score, the higher the required down payment. Your credit score helps lenders predict your level of financial responsibility. A low credit score equals a high risk in the eyes of the lender. If a lender approves you for a loan, it will usually be for a higher down payment.

The more money you have in the home, the more likely you are to make your payments. Lenders look at it like “skin in the game.” For example, if you invested $5,000 in a home, you might not fight hard to keep the home. But, if you had $20,000 invested, you may work much harder to make ends meet. This is why lenders often require higher down payments for risky loans.

If you want to lower the amount you deposit on a home, make your qualifying factors as attractive as possible. Fix your credit so that your score increases. Keep your debt ratio down and have liquid assets on hand. This way you prove to the lender that you are responsible and have money available should your income stop suddenly.

There are plenty of low down payment options. Shop around with different lenders to find the program that suits your needs the best!

Click Here to Get Matched With a Lender»

What are the Common Non QM Underwriting Guidelines?

By

Bill folded house

You don’t fit the standard mold for mortgage applicants so you think you won’t get a loan. Luckily, there are many lenders today that offer non QM loans. These “non qualified” loans provide borrowers just like you a chance to own a home. You don’t have to abide by the strict qualified mortgage guidelines – lenders are able to make their own rules.

How far can lenders go? Luckily for us, they can’t go too far. They still have to abide by the Ability-to-Repay Rules. Every loan must meet these requirements. If a lender wants to go above and beyond and meet the Qualified Mortgage guidelines, they can. But they are restricted on who they can lend to.

Click to See the Latest Mortgage Rates»

Here we’ll look at Qualified Mortgage Guidelines as well as non-Qualified Guidelines so you can see how they compare.

Qualified Mortgage Guidelines

Your standard lenders offer what’s called a Qualified Mortgage. In other words, they receive protection against litigation from their borrowers. If a borrower becomes unable to pay their mortgage, they can’t sue the lender for giving them a loan they couldn’t afford.

Qualified Mortgages meet the following requirements:

  • Points and fees on the loan can’t exceed 3% of the loan amount
  • The loan can’t have any type of negative amortization or interest only payments
  • The term may not exceed 30 years
  • The income used for qualifying must be verified with paystubs, W-2s, and/or tax returns

Some borrowers don’t meet these requirements, though. The largest one is the income verification. A good example is a self-employed borrower. If you have only worked for yourself for the last 6 months, you won’t have tax returns providing your income yet. Even if you have been working for yourself for a long time, if you report a loss on your taxes, you can’t support a mortgage payment.

It’s borrowers like these or those that need a unique term that need a non QM loan.

Non QM Guidelines

The non qualified loans have different requirements. In fact, the requirements likely differ from lender to lender. The one thing they all have in common, though, is that they meet the Ability to Repay requirements. Every loan, qualified or not, must meet these requirements.

They are as follows:

  • You supply some type of proof of your income that supports the payment. It doesn’t have to be W-2s and tax returns. You can use your bank statements if they show consistent deposits of your regular income.
  • You supply proof of your assets if you don’t work and will use your assets to make the mortgage payments. You’ll need to provide enough statements to prove to the lender that you can afford the loan even without a job.
  • You’ll need proof of your current employment if you use it for qualifying purposes. If you use your assets instead, you won’t need to prove any type of employment.
  • You’ll need proof that you meet the minimum credit score that the lender requires. There’s no minimum score needed across the board. It depends on the lender and what risks they can take.
  • You’ll need proof that you have the minimum down payment required. Again, this varies by lender. Some lenders allow as much as a 95% LTV, while others only allow 85% or lower.
  • The lender must use the fully indexed interest rate for qualifying. Even if you take an ARM with a lower introductory rate, the lender must determine if you can afford the maximum rate.
  • You must also meet the required waiting period after a bankruptcy or foreclosure. These waiting periods will also vary by lender.

Additional Underwriting Guidelines

That’s not all. The lender must also make sure that you can:

  • Make the monthly mortgage payment (principal and interest) without issue
  • Make the monthly mortgage payment on any 2nd liens you hold
  • Afford your real estate taxes and homeowner’s insurance
  • Afford your current debts alongside your new mortgage; this includes alimony and child support payments
  • Have enough residual income after you pay all of your monthly bills

Again, these requirements may vary by lender. For example, some lenders may allow a credit score as low as 500 while another may require one as high as 620. These lenders keep non QM loans on their books. They don’t sell them to Fannie Mae or Freddie Mac. This means they can accept whatever risk they deem acceptable.

When you apply for a non qualified loan, you’ll go through the same process you would if you applied for a qualified loan. You must provide your personal identifying information. This includes your name, address, and social security number. You must also provide all financial information along with proof to support it.

The lender will run your file through underwriting and determine what conditions exist. Once you know the conditions, you must supply the appropriate proof. The underwriter will review your documents and decide if you can afford the loan.

The Ability to Repay rule works to protect you. Even though it may seem like it adds another layer of requirements onto your loan, it prevents you from taking a loan you can’t afford. If you don’t fit the mold for a qualified mortgage, shop around for a non QM loan. There are many lenders out there willing to supply these types of mortgages today. Shop around and find the best loan for your situation.

Click Here to Get Matched With a Lender»

What’s the Difference Between Qualified and Non-Qualified Mortgages?

By

House keys

After the housing crisis and the start of the Dodd-Frank Act, you likely heard a lot about qualified and non-qualified mortgages. Non-qualified sounds bad, just like subprime does. But it’s not as bad as it sounds. Understanding the difference can help you determine which is right for you.

What are Qualified Mortgages?

Qualified mortgages are those that the lender went above and beyond to make sure you could afford the loan. You demonstrate the ability to repay the loan in several ways:

  • Your debt ratio does not exceed 43%.
  • You can fully document and prove your income using standard methods. This includes providing paystubs, W-2s, and tax returns if necessary.
  • Your liabilities are fully verified and documented with accurate monthly payments

In addition to your ability to repay, the loan must meet several other qualifications. The lender controls these issues, though.

  • The lender can’t charge more than 3% of the loan amount in total fees. This includes any points charged on the loan.
  • There must not be a pre-payment penalty. You should be able to pay the loan off whenever you want.
  • The loan may not be interest-only. It must be a fully amortized loan.
  • There can’t be a balloon payment at the end of the term.
  • The loan must not have a term that is excessively long.

If lenders follow each of these rules, they are protected against litigation from the borrower. The lender can’t claim that the lender falsely approved them for the loan. The lender can prove that they adequately qualified the borrower’s income, debts, and assets. They can also prove that they made sure the borrower could afford the maximum payment on the loan, in the case of an ARM.

Click to See the Latest Mortgage Rates»

Another benefit of the Qualified Mortgage loan is the lender’s ability to sell it on the secondary market. Lenders don’t have to keep the loans’ on their own books. They have the option to sell them and make room for new loans.

The idea behind the Qualified Mortgage program is to minimize the number of “bad” loans written. When lenders carefully evaluate a borrower’s ability to repay, they lower the risk of default. This helps not only the lender, but the borrower and the community as well. The fewer foreclosures that are out there, the less negative impact there is on property values. In the end, everyone wins from the little bit of extra work QM loans require.

What are Non-Qualified Mortgages?

Any loan that doesn’t fall into the QM guidelines is a non-qualified mortgage. Again, this isn’t necessarily a bad thing. It doesn’t mean you have bad credit or you fabricate your income. It just has something that doesn’t meet the QM guidelines. They are what you might call “creative” loans. They don’t meet the standard guidelines, but the lender still must make sure you can afford the loan.

One rule that is a commonality between QM and non-QM loans is the Ability to Repay Rule. Every borrower must meet this rule. It means that the lender made a good faith effort to ensure that you can afford the loan, whether or not it’s a qualified loan.

In general, the following differences occur in the non-QM loan:

  • The loan usually has a higher interest rate and higher fees. This often makes it non-QM because it doesn’t fit within the 3% rule of QM loans.
  • The borrower might not be able to verify his income the traditional way. Self-employed and wealthy unemployed borrowers are a good example. They may use their bank statements to qualify for a loan rather than paystubs and tax returns.
  • The loan might have an interest-only feature or a balloon payment.

Again, the lender must make sure the borrower can afford the loan, no matter its type. The largest difference, however, is lenders must keep these loans on their books. Fannie Mae and Freddie Mac will not buy them. This means the lender creates their own portfolio with the loans on their books. It could limit the number of loans they write.

Who Are the Best Candidates for Non-QM Loans?

It might seem strange to think that anyone would willingly take a non-QM loan. With no restriction on fees or interest rates, it could be trouble. But, there are certain lenders that just don’t fit the mold. Their options are to not have a mortgage or take one from a non-QM lender. That being said, not all non-qualified mortgage lenders are bad.

The key is to shop around. You’ll find the lender that suits your needs the best this way.

Following are the most common borrowers to opt for non-qualified mortgages:

The most common borrower, as we discussed briefly above, is the self-employed borrower. Fannie Mae and the FHA often require borrowers to have a 2-year history of self-employment before qualifying for a QM loan. What if you just started your business but need a mortgage? You can opt for a non-QM loan. Many lenders have programs for self-employed borrowers. These programs allow the use of bank statements rather than 2 years of tax returns.

Another common borrower is the wealthy borrowers without a job. These borrowers don’t need to work. They live on the income from their investments. Again, this isn’t a steady job that a lender can prove. This precludes them from a qualified mortgage. A non-QM lender, however, can use the bank statements as proof of income and the ability to repay the loan.

Any borrower that suffered a negative economic event usually does best with a non-QM loan. For example, if you file for bankruptcy, you’ll have a required waiting period with FHA and Fannie Mae loans. A lender writing non-QM loans, though, may reduce that period. They may want to make sure you have fully recovered from the BK, but they may not make you wait 2 years or more like other programs.

Should You Take a Non-Qualified Mortgage?

The bigger question is whether you should take a non-qualified mortgage? Should you pay more for a loan? Keep in mind that not all non-QM loans cost more. It depends on the lender and the scope of your application. If you have a tricky situation, you’re going to pay for it, literally.

Lenders need to make up for the risk of default that your loan poses. If you had a recent BK, but the lender will give you a loan, you may pay a few points. Let’s say it’s a $200,000 loan and they charge 2 points. Is $4,000 worth it for you to get a loan now rather than waiting 2 years? That’s a personal decision, of course. But, it’s what you must consider when you decide if a non-QM loan is right for you.

It may even be possible to find a non-qualified mortgage for the same fee or rate as a QM loan. It depends on the lender and what you present to them. Don’t discount the benefit of the non-QM loan, though. If you need one and it’s the only way to get approved, shop around to find the deal that works best for you.

Click Here to Get Matched With a Lender»

How to Find Non-Conforming Home Loans

By

House

Non-conforming loans took a break after the housing crisis. Unless you had perfect credit, you weren’t getting a loan. Today, things have changed. You can secure a subprime loan from a variety of lenders. Borrowers that are self-employed, have less than perfect credit, or don’t have consistent income are great candidates.

You’ll need a lender that funds the loans in-house. Read on to see how to proceed.

Call Different Banks

The first step is the hard part. You have to call around to find banks that keep loans on their books. Some banks advertise that they provide non-conforming loans. Others, you’d never know unless you called. Try to steer away from the bigger banks – they typically only hand conforming and government-backed loans. You want banks that are more local and smaller. They’re more likely to have a mortgage option for you.

Click to See the Latest Mortgage Rates»

Don’t restrict your search to just a few banks. Consider credit unions and mortgage lenders even outside your general area. If you have a specific circumstance, there might be a lender out there that specializes in it.

Ask About the Non-Conforming Home Loan Programs

Every bank will have a different program. This isn’t like the conforming loans where there are Fannie Mae/Freddie Mac guidelines everyone must follow. There is no secondary investor in this case. The bank has the final say.

This means they may be able to grant exceptions. It pays to be upfront and honest with each lender. Let them know your exact circumstances. They may be able to come up with a program for you. Just be prepared to disclose your income, assets, credit score, and employment information. The more information you provide up front, the more they will be able to help you.

Apply for the Non-Conforming Loan

Once you narrow your lenders down to a few, go ahead and apply for the loan. This way the lender can formally pull your credit. They can also evaluate your loan file a little closer. By doing this, the lender must also send you a Loan Estimate within 3 business days. This is what you are after. This is where you’ll get the information on the true cost of the loan.

Once you have the Loan Estimates from a few lenders, compare them. Look at the interest rate and the APR first. These are two major factors in your loan. The interest rate is the interest you’ll pay each month. The APR is the annual interest rate. It’s a true reflection of the cost of the loan.

When you look at the loans side-by-side, focus on the APR. This way you can tell which loan will cost you the most in the long run. You might find a loan with a low interest rate but very high APR. This usually means the loan has higher fees. You can decide if this is something you want to pay for the next 30 years. The lower interest rate might not mean as much to you when you look at it in those terms.

Watch Out for Fees

Every loan has fees unless you negotiate a no-closing cost loan with your lender. But, just because you have a non-conforming loan doesn’t mean you should overpay. Pay close attention to the origination, discount, and processing fees. Some lenders break the fees down individually. Others put them as one lump sum. Either way, you can total up the fees and see which one offers the best deal.

The non-conforming loan can help you get into the home you want. Today, there are hundreds of lenders out there. It’s up to you to do the hard work and see which one is right for you. There aren’t cut and dry regulations for these loans. Each lender will have unique programs. Use this to your advantage and find the loan that is right for you.

Click Here to get Matched With a Lender»

Understanding the Characteristics of a Non-Qualified Mortgage

By

 

FamilyIf a loan doesn’t meet the Qualified Mortgage Rules, it’s considered a non-qualified mortgage. Understanding the characteristics of a non-qualified mortgage can help you decide if it’s right for you. Nowhere does it state that a non-QM loan is bad. You should just understand what it is though. You should also understand what it means for your financial future before proceeding.

What is a Non-Qualified Mortgage?

Let’s start with this. A non-qualified mortgage is not necessarily a high-risk loan. Basically, it’s a loan that doesn’t meet the Qualified Mortgage Guidelines. So let’s look at what those QM guidelines are:

  • no more than 3 points charged upfront
  • doesn’t exceed a 30 year term
  • fully amortizes principal and interest
  • doesn’t have negative amortization
  • debt ratio that doesn’t exceed 43%

So as you can see a non-QM loan could simply be an interest only loan. Does this make it bad? It doesn’t. It just doesn’t meet the QM guidelines because of the risk of payment shock the borrower might experience.

Who Benefits From the Qualified Mortgage?

Both the lender and the borrower benefit from the Qualified Mortgage.

The lender benefits because they are protected against legislation should the borrower default. As long as the lender follows all QM guidelines they can’t be sued by the borrower. This includes putting forth good effort in establishing the ability to repay the loan.

Click to See the Latest Mortgage Rates»

The borrower, of course, benefits by securing a loan they can afford. Generally, that’s the idea whether it’s qualified or not. But, there are some extra precautions in place that safeguard borrowers with the QM loan. This doesn’t mean, though, that non-qualified mortgages automatically put a borrower at risk.

The Characteristics of a Non-Qualified Loan

So now let’s look at what the characteristics of a non-qualified loan look like:

  • Interest only loans – Despite the housing crisis being blamed on loans like the interest only loan, they still exist. The primary borrowers with this type of loan are the wealthy investors. They often flip homes and don’t need to worry about paying down the principal. They take the interest only loan to help them have cash flow while they fix the home up. Once they sell it, they pay the loan off.
  • Stated income loans – This is another type of loan that many put the blame for the housing crisis on. Today’s stated income loans aren’t the same, though. They are more like an alternative documentation loan. Rather than “stating” income, borrowers provide different documentation. For example, rather than paystubs and W-2s, they might provide bank statements. The income is verified, just in a different way.
  • Verified asset – Borrowers that don’t have a current income but have enough assets to cover the mortgage payments may use the Verified Asset program. This is a non-qualified program since the lender doesn’t directly verify income.

The basic characteristics of a non-qualified loan are those that make it a risky loan. A few other examples include loans given to borrowers who recently had a bankruptcy or foreclosure. Lenders that allow a shorter waiting period than the standard FHA, VA, and conventional guidelines fall under the non-QM category.

The largest category of borrowers that take out a non-qualified mortgage, however, are the self-employed borrowers. These borrowers may not have the paperwork showing the income they actually make. Or they make less on paper than they truly bring in. The most common issue is the borrower that is self-employed for less than 2 years. Most FHA and conventional lenders won’t be able to accept this income. A non-QM lender would be able to, though.

You could call these loans “subprime,” but they really aren’t. They are just loans provided by private lenders that choose to carry the loans in their own portfolio.

All Loans Must Meet the Ability-to-Repay Rules

No matter what type of loan you take out, it must meet the ability-to-repay rules.  Basically, this means the lender made a good faith effort in determining that you can afford the loan.

The method the lender uses depends on the lender’s own requirements. In a perfect world, this means documenting income and assets. But when that’s not the case, the lender must use adequate effort to make sure the loan is affordable. In addition, the borrower must make sure the fully amortized payment is affordable. This is the case in interest only loans as well as adjustable rate loans. Lenders can’t use the teaser rate to determine if a borrower can afford the loan.

Maximizing the efforts to make sure borrowers can afford a loan can help minimize default. As you can see, the characteristics of a non-qualified mortgage aren’t bad characteristics. They are just alternate ways to help borrowers get a loan that they can afford.

Click Here to get Matched With a Lender»

Here Are Tips To Change Your Credit Score For The Better

By

Adults

Keeping a good credit score has a lot of benefits other than raising your chances of getting your home loan application approved. Some of its benefits could be that it helps you create a good impression toward future employers and it’s safe to say that it does more good for you than you think.

In the case of conventional home loan applications, there are specific credit score qualifications that need to be met in order to get a mortgage. And there are still a lot of applicants that get denied because of their not-so-satisfactory scores. Some would look for other loans with flexible requirements just like FHA loans and non-QM loans.

But if you want to reap its benefits other than loan approval, there are ways to boost your credit scores. Here are some of them:

Reports can have errors and you can definitely do something to correct them.

Getting credit reports regularly keeps you on track on with your score. But mistakes can happen. According to a report from the Federal Trade Commission, 20% of consumers have to dispute and fix the errors they spot on their reports.

As a result, they see a rise in their scores. So it’s good to be very particular about these reports. If you overlook on it, there might be errors you’d miss to correct.

Let our lenders help you.

 

It’s okay to have one or two credit card accounts.

You would probably ask how something that could potentially add up to your debt would help you improve your credit score. But contrary to that belief, having a credit card line could actually give your score a boost.

This would show that you could be trusted in carrying out debts and paying them on time. Also, sometimes having no credit card could put your score at risk to some degree. Just remember that having one is a responsibility that needs to be fulfilled at all times.

But then there’s a catch.

Yes, getting a credit card is okay. But it doesn’t mean that you just go ahead and swipe your card like it weaves magic. Remember that your ability to pay your debt is what would keep your credit score in good condition.

So don’t overuse your credit card. Make sure you only use them when you need them and make sure that you are being responsible by paying your dues.

Always pay on time.

Payment history plays a big role in your FICO score. If you have a late payment or if you have skipped a payment, that would definitely be reflected in your score.

Nothing spells out “responsible” more than showing your ability to pay your dues on time. Therefore this rule bears repeating as needed. So here it is once more: Always pay your debt on time.

Seek counsel if needed.

Credit counseling doesn’t really do much on your score but if you’re having a difficult time making ends meet, counseling would definitely help your management skill when dealing with your debt.

From there, applying what you have learned from counseling can make wonders towards improving your FICO score.

Click to See the Latest Mortgage Rates»