Saying that US loan products are as varied as the borrowers who apply for them isn’t far-fetched at all. In fact, many loan types have been created to cater to a specific type or types of borrowers. One of which we’ll be discussing in detail below – the non-qualified mortgage loan.
January 10, 2014 marked the implementation of the Dodd-Frank Act. Essentially, it broke down residential mortgage loans into two categories – qualifying and non-qualifying.
Under this rule, the loan should meet the following parameters to be considered a “qualified” loan:
- A borrower’s debt-to-income (DTI) ratio should not be more than 43%.
- The loan’s fees cannot exceed the cap provided in the regulation. This could vary depending on loan size.
- A qualified loan may not have balloon payments.
- The maximum loan term is 30 years.
When the loan does not meet all of the aforementioned requirements, it is then considered non-qualified. For this type of loan, a lender must then meet what’s collectively called as ability-to-repay standards. These are composed of specific components designed to establish a borrower’s ability to repay a loan continuously for the duration of its specified term.
Borrowers who can benefit the most from a non-qualified mortgage loan fall into one of these two extreme categories.
- Very wealthy individuals who have highly liquid assets but with irregular income. Rich people typically use non-qualified mortgage loans as a “bridge” loan. They apply for one while awaiting the completion of some large business transaction expected to result in a large stream of cash.
- First-time homeowners that come from low-income areas. Their present economic circumstances make them ineligible for the qualified loan option. As such, a loan that does not conform to the parameters of a standard loan.
Lender Risk Factor
While it may not conform to federal standards, non-qualified mortgages aren’t necessarily high risk. In many cases, a lender will actually require that a borrower has an extremely high credit score, a steady job, and a sizeable asset portfolio.
Banks or private lenders allow for stated income. This means that a borrower may simply state how much his income is on the application form, without the need to present paystubs and other similar documents. Income is verified by reviewing bank statements.
A reliable lender will be able to walk you through the particulars of a non-qualified loan and ascertain whether it’s a good fit, considering your financial circumstances.