Every mortgage has a minimum credit score parameter, but it is not always easy to figure them out. Yes, Fannie Mae, Freddie Mac, FHA, and VA loans all have posted minimum scores, but that does not mean each lender abides by those rules. They cannot go lower than the posted score, but they can require higher minimum scores if they so choose or if the investor requires them to or they will not purchase the loan. Non-QM loans, on the other hand, are a bit different – there is no set minimum credit score by any agency as they are non-qualified loans. This means the credit score minimums are dependent upon the lenders themselves and possibly the investors, if there are any purchasing the loans on the secondary market.
If you are trying to obtain a non-QM loan, it means you have some type of factor that disqualifies you for a QM loan. Whether it is the fact that you have a debt-ratio higher than 43%; your income is not consistent so cannot be verified; or the lender needs to charge you more than 3% of your mortgage amount in fees, you are not qualified for a standard loan type. This means you will have to shop around with a variety of lenders as each one is willing to take on different risks. You can do this in several ways:
- Call around to various lenders explaining your situation, such as you are self-employed and do not have adequate income reporting on your tax returns or you have a debt-ratio exceeding 43%. Each lender can tell you if your situation is one they would entertain before you apply.
- Apply with several lenders within a short period of time and see who provides you with not only an approval, but also the best terms. If you apply for a mortgage with several lenders within a few weeks your credit score will not be hit for each inquiry – it gets hit only once.
Every lender operates differently – some keep the loans on their own books, so they have to determine what type of risk they can take. This depends on the portfolio already in existence and how you make it better or worse. Other lenders sell their loans to investors, which will have the final say in what they will or will not purchase. This is why there is not a set minimum credit score for non-QM loans – every lender will differ and they may even make stipulations up as they go depending on the circumstances each loan provides them with upon application.
How Non-QM Lenders Make up for Lower Credit Scores
If the reason you cannot obtain a QM loan is because your credit score is “low”, you will have to make up for the risk in fees. This is how lenders back themselves up, so to speak. They charge you more for the loan up front. This way, in the event that you default on your loan, they still made more money up front than they would have if you were a QM borrower. Of course, this does not mean they are going to lend to just anyone because they know they can charge more than the standard 3% in fees – they still have to make sure your risk is one they can handle as they want to do whatever they can to ensure that their borrowers do not default.
Ability to Repay
The Ability-to-Repay Rule is the easiest ways for lenders to determine if your loan is worth taking on despite the fact that it will not be considered qualified. Because it is non-qualified, it leaves the lender open to the risk of borrowers suing them if they are unable to afford the loan down the road. The Ability-to-Repay Rule, however, backs the lender up slightly. This rule ensures that every borrower shows ample evidence that he can afford the loan including its higher interest rate and/or fees. The Ability-to-Repay Rule looks at the following:
- Credit history
- Debt-to-income ratio
What this means is that the lender did its due diligence determining whether or not you can afford the loan. For example, if they take your loan despite the fact that your self-employment started just one year ago, they have to prove that you can show the income, reserves, responsible credit history, and manageable debt ratio. Typically a compensating factor for self-employed borrowers is adequate reserves as this offsets the fact that your income is not quite regular or looks to be that way based on your latest tax returns.
The Ability to Repay Rule is a way to keep lenders accountable for the loans they are providing borrowers without getting greedy. If a lender cannot prove beyond a reasonable doubt that a borrower can make his mortgage payments with or without self-employed income, for example, then he is not considered a good risk, even for non-QM loans.
Overall, lenders look at your entire loan profile, not just your credit score. This should be encouraging for borrowers that have a slightly lower credit score, yet have compensating factors. Even if Fannie Mae’s Desktop Underwriting program turns you away, it does not leave you without the ability to get a loan. Finding lenders that offer non-QM loans is not as difficult as it once was a few years past; more and more lenders offer them, it just depends on the level of risk they are willing to take. Remember, every lender needs to balance out their portfolio by diversifying their risk. They will only take a certain number of loans with a high debt-ratio; a certain number with low credit scores; and a certain number of self-employed borrowers, just as an example. If one lender turns you down it is not because your loan profile makes you unqualified; it could just mean that you are unqualified for the type of loan they are trying to fit into their portfolio.