In the wake of the mortgage crisis, subprime mortgages seemed to go by the wayside. They were suddenly just not available since the finger was being pointed at them for the reason for the downfall. Was that the reason? No one will truly know, but the good news is that subprime mortgages have made a comeback, just with a new name. That new name is the “non-qualified loan.” The name came about as a result of the new guidelines set forth by the government. After the housing crisis, all loans had to be a “Qualified Loan.” If it did not fall within these guidelines, it was not qualified and the borrower could not come back at the lender if they were to default.
Qualified Mortgage Guidelines
A qualified mortgage is one that the lender can prove without a doubt that you can afford. This is not a subjective decision either; the government set forth specific guidelines that each loan must meet in order to be considered qualified. These guidelines include:
- A debt ratio cannot be higher than 43 percent – no exceptions
- The money the lender charges for discount points or origination fees cannot total more than 3 percent of the loan
- The loan must be a straightforward amortization
- You must provide adequate proof of your income
- The term cannot be longer than 30 years
What does it Mean to be a Qualified Loan?
Aside from meeting the above guidelines, qualified loan holders have a little more justification should they default on their loan. With a qualified mortgage, the borrower has the right to sue the lender if he were to be unable to afford the loan down the road. In addition, lenders are subjected to penalties if they provide loans to borrowers under the QM guidelines and they do not meet them. The qualified loan basically means that the lender evaluated every possible aspect of the loan file to determine that it is a good fit for the borrower.
The Non-Qualified Mortgage Loans
The good news is that the borrowers that do not fall under the qualified guidelines can still obtain a mortgage. They actually have a little more leeway, which is where non-qualified loans come across as subprime loans. Not every lender is going to offer this type of loan because they are unable to sell it on the market – they have to keep the loan in their own portfolio. This might require you to do a little shopping around to find the right lender.
Borrowers that do not meet the QM guidelines will need to have compensating factors to make up for the downside of their loan file. For example, a higher than 43 percent debt ratio would need a compensating factor in order for the lender to see that it is not a completely risky loan. One way to offset a high debt ratio is with adequate reserves in your bank account. If you can show the lender that you have 6 to 12 months’ worth of reserves on hand, your loan suddenly becomes less risky.
Something that is very different for non-qualified loans versus subprime loans is the work the lender needs to do to make sure you meet the “ Ability to Repay” rules. These rules require lenders to ensure that they verify your income, assets, and employment as well as ensure that your debt ratio is accurate and that they take a close look at your credit history. What this means basically, is that you cannot have any type of “stated income” loan, although there are ways around that as well. If you cannot prove your income the standard way, you can get away with using bank statements to prove your income. This is a version of a stated income loan but with an alternate verification.
In the end, everyone gets funding, it is just a matter of how you get it. Yes, QM loans have lower interest rates and lower fees, but conventional loans always had lower rates and fees than subprime loans did too. The key factor is that you are able to get a loan that you can afford, getting you into the home you desire.