If you say the word “subprime loan” to a banker, you will likely see him cringe in return. Bankers do not like the term subprime any longer and are not making subprime loans as of today, so to speak. What they are offering, are loans with a different name – Non QM Loans, which stands for non-Qualified Mortgage Loans. That sounds a little better, doesn’t it? It could be just because of the tarnished name that subprime got over the years of the housing crisis, but whatever the case may be, non QM loans are making a comeback and a necessary comeback at that.
Qualified Mortgages are Not for Everyone
A qualified mortgage is a mortgage that meets very strict guidelines. These are the mortgages that Fannie Mae, Freddie Mac, FHA, VA, and the USDA will purchase and/or guarantee. These loans fit a perfect mold and are a perfect fit for certain borrowers – but not all borrowers! Unfortunately, the housing crisis did not only hurt the banks, it hurt consumers too. Many of these consumers have not quite bounced back to the point that they would fit the mold of standard, conventional lending. This leaves them without the ability to get a home, unless they obtain a non-QM loan. Getting around the QM guidelines, these lenders are requiring other mitigating factors to make up for whatever it is that prevents the consumer from falling under the Qualified Mortgage guidelines. Typically, it is the debt ratio that is making these loans non-qualified as 43% is the maximum to qualify. The borrowers that have lower credit scores are naturally going to be charged a higher interest rate, which then pushes their DTI over that threshold – making them “subprime.”
Getting More People into Homes
The Qualified Mortgage guidelines are pushing people that had recent credit issues away from owning a home, which is why the non-QM loans are making a comeback. These are the loans for people that had bad things happen to them – maybe they suffered a bankruptcy or foreclosure or maybe they defaulted on several credit lines as a result of losing their job or being downsized. These life events may have passed for these people and they are trying to make a name for themselves again, but with the stricter mortgage guidelines in place, it is becoming impossible.
Subprime Means Something Different Today
Just because a loan is non-QM today, does not mean that it must not meet the Ability to Repay Rules – yet another rule put into place by the Dodd-Frank Act. This rule states that each borrower must be able to pay the loan by proving their income and assets; be able to verify their employment; have all payments figured into their debt ratio that apply to the house as well as other monthly obligations; and have satisfactory credit history. To sum it up, it means that banks must do their due diligence to ensure that a borrower can in fact, afford the loan despite the slightly higher interest rate that may be charged. Lenders are still unable to charge excessive fees or provide risky terms, such as negative amortization or interest only payments. Basically, the borrowers allowed the non-QM loans are those that have a credit history that does not allow them to qualify for a standard loan yet they can prove that they can afford the loan.
If you are looking for a loan and do not fall within the conforming or FHA guidelines, non-QM loans could be your best bet. As long as you have compensating factors for your lower credit score or poor credit history, such as any of the following, you may have better luck than you think at getting a loan.
- Excessive reserves/assets
- Low debt ratio
- High down payment
- Stable employment history
More and more investors are realizing the profits to be had in the non-QM lending industry and the benefit it will have on the economy. Many lenders are still keeping these loans on their own books, but as more and more investors come forward, the funds will begin to pool and more non-QM loans will begin to flood the market, making getting a loan easier yet today, but not as easy as we saw in the early 2000’s.