Non-qualified loans are those loans that do not fall under the Qualified Guidelines. These guidelines were put in place after the housing crisis occurred in order to prevent that large of a number of defaults from happening again. The QM guidelines help give lenders restrictions regarding which exceptions they should allow. For example, many lenders were prone to allowing borrowers through that had a higher debt ratio. Those borrowers were among those that defaulted in the end because there are only so many ways a person’s money can be stretched each month. With the new QM rules and the strict 43 percent guideline in place, lenders are now restricted to who they lend to if they want the protection of not being able to be sued by the borrower if they default or being subjected to penalties by the government.
Not Everyone has to be Perfect
The good news is that not everyone has to be perfect in order to get a mortgage. If your debt ratio is higher than 43 percent, but you have a reason or you have compensating factors, such as a stable job for the last 10 years or a high credit score, the lender might be able to make an exception. That exception cannot fall under the QM guidelines, though. You have to find lenders that are willing to fund the loan themselves and keep it on their portfolio as non-QM loans cannot be sold to investors. There are many lenders willing to do this, though, which means there are plenty of opportunities out there for those with less than perfect credit or higher than average debt ratios.
Who are the Candidates for Non-Qualified Home Loans?
There are many people that would qualify for a non-qualified loan. The most common borrowers include:
- Self-employed borrowers – This is the largest category of people that qualify for this loan type. These are the people that either write off a large number of expenses on their taxes in order to keep their tax liability down or have a large number of expenses, making their income look very small. In addition, anyone that has been self-employed for less than 2 years typically cannot get a Qualified Mortgage, making the non-qualified mortgage a great option.
- People on the borderline of qualifying – There are people that are so close to qualifying for a QM loan, but one factor sets them over. For example, if your debt ratio is 44%, you will not qualify for a QM loan. A non-QM loan is a great alternative. It does not mean that the lender has the right to overcharge you in points and fees – it just means that you might have to go to a different lender than you would have for a QM loan.
- People with lower credit scores because of the economy downfall – These are the people that suffered bankruptcies, foreclosures, and late payments as a result of losing their job. Now that they are trying to get back on their feet, they need a second chance. Their income might not be as high as before or their credit might be damaged, but they are picking themselves back up and want to get back into home ownership.
Basically, any borrower could make a good candidate for a non-qualified loan, but the ones that they affect the most are those that are self-employed or are trying to make a comeback after the economy’s downfall. For the most part, the economy has bounced back, but there are still certain areas that suffer. Giving people a second chance at home ownership and turning their financial life around is what the non-qualified loans are all about.