The federal government has identified what characteristics a qualified mortgage should have. Measures are also in place to protect lenders from the legal repercussions of a default. Nevertheless, banks and private financial institutions are offering non-qualified mortgages because there is still a demand for them. There’s an entire demographic out there with low credit scores and a debt-to-income ratio that’s well over 43 percent. These individuals need financing and lenders are there to deliver.
Since non-qualified mortgages are primarily intended for risky borrowers, lenders are taking steps to bulletproof this type of offering. Here are some measures currently in place.
Demonstrated willingness to pay
A borrower’s financial viability is demonstrated through high credit scores. Lenders are also favoring individuals who’ve had experience in paying a mortgage before. However, that’s not to say that new homebuyers won’t be able to qualify. Further documentation may be required of those applying for a home loan for the first-time.
Full documentation is required
Paperwork showing all possible income sources, a record of assets, and a complete employment history is also a requirement for most Non-QM options. Borrowers with strong mortgage histories with a bank, private lender, or credit union may benefit from having documentation requirements streamlined.
Flexibility for high-income earners
Lenders are designing flexible options for their high-income clientele. Individuals with hefty commissions or expansive investment portfolios are usually given unique repayment options. One such product is the interest only loan, which permits the borrower to only pay off the interest within the set loan term and work on paying the principal later on.
Exceptional process and controls
In the past, banks have had a hard time implementing solid origination and servicing practices. This is now starting to change. Financial institutions are implementing guidelines for non-qualified mortgages based on:
- Consistent application of underwriting standards.
- Adherence to fair-lending requirements during the underwriting and loan pricing processes.