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.
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.