Non-QM loans are something that came about a few years ago after the Dodd-Frank Act went into effect. Non-QM loans are essentially loans that do not meet the Qualified Mortgage Guidelines. If a loan does not meet the QM guidelines, it cannot be sold to Fannie Mae or Freddie Mac. This greatly lowered the number of lenders that offer these types of mortgage, but it did not diminish them altogether – there are still plenty of lenders that offer them because of their profitability and basic ability to help potential borrowers become homeowners.
What is a Non-QM Loan?
Basically, a non-QM loan is almost any non-conventional loan on the market, but even some conventional loans might not meet the requirements depending on the fees the lender charges. Typically, a non-QM loan does not meet the following guidelines:
- Fully amortized loan (no interest-only payments or negative amortization)
- No balloon payments
- No loan terms in excess of 30 years
- No excessive upfront fees or discount points (no more than 3% of the loan)
- Debt ratio lower than 43%
- Fully documented income
As you can see, these terms leave out people that would need any type of assistance in obtaining a loan. For example, self-employed borrowers that do not have enough income on standard income documents to qualify for the loan would be left out. Luckily, there are non-QM loans that lenders offer that are either sold to private investors in the secondary market or kept on their own portfolios.
Meeting the Ability to Repay Rule
One factor that both QM and non-QM mortgages have in common, however, is the need to meet the Ability to Repay Rules. These rules state that the lender did everything possible to determine that the borrower can, in fact, afford the loan. This is especially important with low doc or stated income loans, as the lender is not using the standard format to verify the income. The lender needs to go to great lengths to determine without a doubt that the loan does not put the borrower under any type of financial hardship. Basically, the lender needs to evaluate the following:
- The income and/or assets that the borrower will use to pay the mortgage, ensuring that they are legitimate and likely to continue
- Verify employment
- Full mortgage payment including principal, interest, taxes, and insurance and how they compare to your monthly income
- Any other debts that are incurred on a regular basis
- Residual income
- Credit history
When the lender evaluates every area above, whether in the standard format or with their own requirements as they relate to a stated income loan, they can properly determine if the borrower can afford the loan and avoid the disaster that the mortgage crisis caused with the large number of stated income and no doc loans that were provided.
Finding a Non-QM Lender
Finding a non-QM lender is not as hard as it was in the early days after the financial crisis. More and more lenders are opening up to the possibility of a non-QM loan. Typically, you should start with private lenders, as they have the capability of flying under the radar with Qualified Mortgages. They often create their own programs and hold the loans in their own portfolio, which gives them much greater flexibility than any other bank would have that must follow the QM loans if they want to sell their mortgages to Fannie Mae or Freddie Mac.
The best way is to start with smaller lenders in your local area. Talk to them about your specific situation to see what they may have to offer. You might be pleasantly surprised to find out that they do not follow the conforming cookie cutter approach to mortgages. If those banks do not have what you need, start looking outside of your local area at smaller banks across the nation. Any bank that caters to self-employed borrowers or borrowers that have a blemished credit history are your best bet for this type of loan, even if you are not self-employed or have a blemished credit history.
You might have your own reasons for requiring a non-QM loan, such as a debt ratio that exceeds 43%. This is not always a bad thing, sometimes there are special circumstances that put you just outside of that debt ratio, but if you have compensating factors that make up for the risk, some lenders will let it slide through. The problem is, however, that you cannot get a QM because of the excessive debt ratio. In this case, you need a lender willing to take a riskier loan and either keep it on their books or sell it to a private investor.
What it comes down to when finding a non-QM lender is plenty of homework. You are not going to find a lender as easily as you would with a QM loan since every lender provides those types of loans. Think of it as a specialized loan that you need to find the perfect lender to provide for you. In general, a lender that plans to keep the loan on their own books will give you the most flexibility because they make up their rules; there are no investors to please. If the lender will sell the loan on the secondary market, however, they will have to abide by the investor’s rules in order to ensure that the lender purchases the loan in the end.