Non-Qualified Loan

Why are Non-QM loans Important in the Market?

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Many of us probably know what non-QM loans are by now. These loans do not conform to the standard definition of a mortgage loan as defined by the federal government. What if non-qualified mortgage (non-QM) loans never existed? What will happen to the housing market?

Is the Non-QM Decline Dawning?

According to the recent Real Estate Lending Survey done by the American Banker’s Association, there are fewer originations on non-QM loans last year. There was only 9 percent in 2016; 5 percent lesser compared to 2015.

Stringent regulations were seen as the main cause for this decline. More than 30 percent of the banks who used to originate non-QMs stopped creating them.

The Misconception About Non-QMs

When we hear about a non-qualified mortgage, some would automatically think “high risk”. This is simply not true. It being high risk is not implicit. In fact, many of the borrowers have and need a good credit score for them to qualify.  They also need to provide documentation to prove and support their income and assets claims.

It is true that non-qualified mortgage loans are designed to help those who cannot qualify for a qualified mortgage. These borrowers may be self-employed, earn through commissions, or simply own businesses. Sometimes, these individuals find it difficult to provide the papers needed in a qualified loan. This lack of income documents though doesn’t automatically mean they lack the finances to afford to pay the loan.

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Non-QMs Keep People in Homes

In the latest data from the Bureau of Labor Statistics, there are 15 million Americans who are self-employed. That accounts for 10.1 percent of the total U.S. population.

Imagine 15 million not having a house because they cannot qualify for a loan. A few of them may be able to get financing through a qualified mortgage, but it will not be an easy feat. Many others will simply not qualify because their income documents may not be sufficient enough.

Non-QM loans provide a huge opportunity to many individuals in terms of homeownership and sustainability. This is a fact that cannot be denied.

It keeps the Housing Market Thriving

Non-qualified Mortgage loans contribute greatly to the housing market. It helps the recovering housing economy thrive. Most non-QMs are offered by private lending institutions, the involvement of their money in the housing industry is critical to the economy’s longevity.

The Non-Qualified mortgage industry may be undervalued because of the misconceptions that are closely linked to it. Once we learn the importance of having this type of loan, we will understand why non-QMs need to be available in the market.

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On Neg Am Loans, and its Pros and Cons

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On Neg Am Loans and its Pros and Cons

One type of Non-qualified Mortgage Loan (or a Non-QM Loan) is the Neg Am Mortgage Loan. In a Neg Am loan, you are not required to pay the monthly interest of the loan. You are only to make minimum payments in a specified number of payments periods.

Amortization is the process of paying off borrowed financing, say a mortgage loan, on scheduled payments over a specified period of time. Each time a borrower pays, a part of it covers the monthly interest, the remaining balance goes towards the principal.

By the end of the loan term, the principal loaned amount and the total interest are paid off completely.

Neg Am stands for negative amortization. It is also known as graduated payment or deferred interest. Because you are not required to pay any amount on the monthly interest, this interest (or whatever interest is left for that month) will rollover to the next month. The unpaid amount will be added back to the loan balance and the loan’s interest rate will apply towards this new loan balance.

What happens in a Neg Am Mortgage Loan?

For Instance, In May, Sam’s remaining principal balance is at $90,000. The annual interest rate of the loan in 6%.

0.06 (interest rate) ÷ 12 (months) x $90,000 (principal balance) = $450 (due for May)

Sam is allowed to makes minimum payments of $400 for a specified period of time. And if Sam pays $400 on the current month’s due, that sets her back $50.

$450 (due for May) – $400 (minimum payment required) = $50 (deferred amount)

The deferred amount will be added to the remaining principal balance, bringing it to $90,050 in total. In June, the computation will be based on the new principal balance. As this continues each month, the principal balance also grows bigger.

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Pros

What good can someone get from a Neg Am mortgage loan?

This loan product is good for those borrowers who intend to take advantage of the low monthly payments and use their remaining money as investment. If the investment pays much higher than the mortgage loan’s interest rate, this can cover the increasing principal balance and have more left for their savings accounts.

The Neg Am is popular with those who are not staying in the property for a long time and are planning to sell it shortly after they have purchased it.

Cons

The risk of the loan becoming uncontrollable is high. If the principal loan amount is not reduced during the specified period where you are only to make minimum payments, you will end up owing much more than the what you originally owe.

And when this specified “negative amortization” is over, you end up with such a huge amount to pay off. This may cause you to default on the loan and risk the property into foreclosure.

A Neg Am mortgage loan is not intended for everyone. If you can very well afford to get a traditional loan, might as well take that opportunity. If you think that this loan product fits your financing needs, do not hesitate to talk to a lender or a loan professional. An expert’s advice can help you make better decisions.

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Which Non-QM Loan Product is Best for You

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Which Non-QM Loan Product is Best for You

There are a variety of Non-QM loan products present in the market. Depending on the borrower’s needs and current situation, one product may help you get the needed financing.

Here are some of the loan products under the Non-Qm territory.

“Beyond-30” Mortgage Loans

This is primarily because of how Qualified Mortgage loans are defined. The regulatory reforms do not allow loan terms that go beyond 30 years. However, there are many consumers looking for a loan with a term stretching as far as 40 years.

If you total the payments in the span of 40 years, you may realize that you are paying a huge interest. Although this is such a long stretch, loans of such kind are still available in the market because they make very low monthly payments possible.

Stated Income Loans

Declare your income and they’ll take your word for it. It’s the basic premise of Stated Income Loans. However, it does not necessarily mean though that you do not provide any document to show your income.

In the QM world, your income has to be fully documented. There is a standard verification and underwriting procedure that needs to be done. Many Americans cannot provide all these papers, and so they won’t be eligible for a QM loan. If this is the case, a stated income loan will work best for them.

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Negative Amortization Loans

Amortization is defined as paying off the loan interest and principal through regular payments. Negative amortization is when you do minimum payments that do not pay off the interest. In the end, this interest will continue to add up.

The unpaid interest will be added to your principal. On the next month, the interest rate will then apply not only to your principal but to the unpaid interest as well.

Although this is not a popular choice for many, there is still a market for this kind of loan.

Jumbo Loans

There are individuals who need extremely large financing. Conforming loans have limits to the amount a borrower can borrow. But because there are some who need and can very well afford to pay such a large amount, jumbo loans are originated by lenders.

It is designed to provide financing for high luxury properties. Because jumbo loans exceed conforming loan limits, they cannot be purchased, securitized or guaranteed by Freddie Mac or Fannie Mae. And because of the huge money involved, there are special underwriting procedures and requirements. Tax implications are also different for this loan product.

Interest-Only Loans

One of the most popular Non-QMs is the Interest-Only loan. Simply put, you pay only the interest in the given term which is usually 4 to 7 years. After this term, you will start paying the principal.

The borrower can then choose to pay off the principal, pay a lump sum, or refinance the loan.

There are many loan products under the Non-Qualified Mortgage bandwagon. What is important is to study your situation and your repayment ability and find the right product for you. Speaking with a lender will help make the search faster.

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Are Non-Qualified Loans Really Safe?

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Are Non-Qualified Loans Really Safe?

When your credit is in bad shape, let’s face it, lenders will turn you down. And just when you think your credit score is the last nail in the coffin, one loan could be the answer. Non-Qualified mortgage loans give some people a chance to have a loan.

Non-Qualified Mortgage Loans, or Non-QM as others call it, are loans that do not fit the Qualified Mortgage Definition.

The aftermath of the recent housing crisis pressed lawmakers to draft new regulatory reforms. It gave birth to the Consumer Protection Act and the Dodd-Frank Reform.

There are minimum standards that mortgage lenders need to meet in order to be classified as a Qualified Mortgage. These new laws governing QMs also protect the lenders in the event that a borrower fails to repay his/her debts and files a lawsuit against the lender.

Now, because the rules are complex and stringent, some lenders noticed that it would be impossible for some people to be eligible for QM loans. Non-QMs came about when lenders started to come up with loan programs to cater to these people.

And since they are not QM loans, they lack the liability protection that QM loans have.

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Are Non-QMs Safe?

Just because they are not Qualified Mortgage loans, it does not mean that Non-QMs are high risk.

Some lenders of this type of loan will still look at your documents and scores. But instead of denying the borrower’s application because of some problems they see in these papers, they will adjust the interest rate or down payment to cover up for these deficiencies.

One example of a Non-QM loan is the “Interest-Only” Loans. Who offers them? Big banks, such as the Bank of America and Chase, make Interest-Only loans available to those who are looking for one.

As its name suggest, the borrower is required to pay the interest from the principal amount within a given term. After this term, the principal will then be paid off. This can be done through a lump sum payment, or the mortgage can be refinanced.

Because of this, applicants may have to go through a rigorous underwriting process. Borrowers may be required a higher FICO score and a very Low LTV to qualify.

Are Non-QMs for Everyone?

Borrowers who have sporadic income but having large assets are the target market for this loan type. For example, there are many Americans who have a steady flow of money but lack the ability to provide a W-2. This does not mean they do not have the ability to repay the loan which is required for a QM. A Non-QM can be perfect for them.

Non-Qualified Mortgage lenders give loan opportunities to individuals who won’t be eligible for a QM loan but can very well afford it. Without this loan type, there will be a huge inadequacy of financing options. Many Americans won’t be able to stay in their homes or buy properties.

Talking to a lender will help you understand Non-QMs better. A lender will also advise you whether it is perfect for you or not. Do not hesitate to learn more about it.

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Is there an Assumable Non-Qualified Loan?

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Is there an Assumable Non-Qualified Loan?

To understand what a “non-qualified loan” is and if it is assumable, we should have a clear understanding of its brother, the qualified loan.

A qualified loan, in the general sense, is a mortgage loan where the lender is protected by the government when a borrower fails to meet his/her payments and decides to file a lawsuit against the lender.

Qualified mortgage loans (QM), being proven to be stable and having clear requirements, are designed for individuals who show proof of their ability and willingness to pay the loan. These individuals’ applications will undergo a stringent documentation and verification process to prove that they have the ability to repay it.

Non-Qualified loans (Non-QM) are any other loans that do not fit the Qualified Loan definition. If a borrower did not meet the standard requirements to prove that he can make the mortgage payments after necessary documentation, he can take a non-qualified loan.

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The Due-on-Sale Clause

When you take a Qualified Loan, most QMs have the “Due-on-Sale Clause”. This clause stipulates that in the event that the property’s ownership is transferred or it is sold, the remaining balance of the loan will be ‘due’ or payable.

In most cases, Qualified Loans are non-assumable. There is one QM loan that is assumable and that is the Veterans Affairs’s mortgage. The person who will assume the loan has to apply at VA to see if he/she is allowed to assume it.

There are Assumable Non-Qualified Loans in the market. There are even more of them than assumable qualified loans. The assumable Non-QM loans do not require any income, credit or employment verification. The one who will assume it will just take over and the lender will do the necessary paperwork to transfer the house title to its new owner.

Consider All Angles

In choosing between getting an assumable non-qualified loan, there are many things to consider. It may require a large down payment to cover what would have been the remaining balance on the mortgage plus the final sales price. If you are planning to stay in that home for a long period of time, putting such a down payment may be worth it. But if you are only going to live in that residence for two to three years, an assumable Non-QM loan won’t benefit you that much. If chosen for the right reasons, this will help you get better interest rates and will allow you to lock in the terms of the previous loan.

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