Non-Qualified Loan

A Closer Look Into Non-Qualified Loan Qualifications

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Perhaps Non-Qualified Mortgage (non-QM) Loans sound a bit new for some but for unique situations, a non-QM loan is a perfect fit. Since it gives an opportunity for borrowers that did not qualify for the conventional guidelines of a Qualified Mortgage, there is a sense of risk that comes with it. But it’s not something to worry about.

On what circumstances does a Non-Qualified loan apply?

Going into specifics, non-QM loans typically answer to individuals that are self-employed for under two years and are not showing a good amount of income on tax returns. Those who have high debt ratio but have a lot of reserves that can make it up can also qualify.

It bears repeating that non-qualified loans don’t necessarily mean that great of a risk thanks to the Ability to Repay (ATR) Rule by the Dodd-Frank Act. Even for non-QM borrowers, lenders will have to ensure that they can take on the responsibilities of paying off the loan.

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How would lenders determine if I qualify?

Lenders would still verify your credentials to see that you can afford to pay the loan in compliance with the ATR rule. Among the factors that lenders would look into are:

Income and assets
Bank statements could prove your funds and make sure you are good for non-QM loans.

Employment
For employed individuals, proof or documentation of your employment status is looked into by lenders to also prove your credentials. Usually, lenders would be able to verify this through W2 forms or pay stubs. For self-employed, income tax returns and a certification from the CPA are required.

Credit Score
This is a very crucial factor for borrowers. To make sure you build a good credit reputation, try not to open a lot of credit accounts, consolidate your debt around and also make sure to keep creditors updated with your personal info whenever you need to.

Debt to income ratio
Non-QM lenders typically allow those who have DTI ratios that are higher than 43% as long as you have a credit score or history that is satisfactory and you meet other non-QM mortgage qualifications.

In the end, it pays to seek advice for non-QM lenders. Shop for different loans and choose what is best fit for your situation.

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Where can I Apply for a Subprime Home Loan?

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Where can I Apply for a Subprime Home Loan?

If you do not have a great credit score, you might find that you do not qualify for conventional or even FHA financing. In fact, even if you do have good credit, but your income is not consistent, such as you are self-employed or work on commission, you still might not qualify for those programs because of the new Dodd-Frank Act of 2010, but that does not mean you will not be able to secure a loan – there are more options out there for you, including a subprime home loan. Finding a place to apply for this loan is not an impossible feat as many people have made it out to be, as time passes and the mortgage crisis gets further and further behind us, more and more lenders are offering these types of programs.

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Where to Look for Subprime Lenders?

Many people overlook the possibility of obtaining subprime financing from a large bank. Immediately following the housing crisis, yes, fewer banks were offering these programs, if any. This was because everyone was scrambling to figure out which end was up and how to come out of the crisis without having to close their doors. Fast forward to today and more lenders are willing to take a chance on borrowers. This is not to say they are offering no documentation loans any longer because those are not allowed by law. What they are offering, however, is alternative documentation loans for those borrowers that might not qualify the traditional way, which means they do not meet the largest requirement of the Qualified Mortgage guidelines, which states that borrowers can properly document their income. Big banks including Chase and Wells Faro are offering subprime loans to borrowers with good credit but need alternative ways to document their income, such as banks statements.

If you do not have the credit scores that the big banks require, you should seek other residential lending entities Credit unions and privately owned banks are amongst your best bets when it comes to qualifying for a subprime loan. These banks have an advantage over any other because they typically keep loans on their own portfolios. If they do sell the loans, they sell to their own private investors, who they know well and understand their requirements. This means that the banks/investors can set their own requirements and cater to a market that the traditional lending market would turn down.

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Everyone Must Meet the Ability to Repay Rules

Aside from the fact that certain lenders can get around the Qualified Mortgage guidelines, offering borrowers a less traditional loan, everyone must meet the Ability to Repay Rules. This means that the lender does its due diligence in determining that a borrower can afford the loan. What this effectively means is that the bank is not providing you with a loan based on the premise that you have income without you actually proving it. You do not have to necessarily provide paystubs and W-2s, but you have to provide proof that you receive income. This is typically done with the last 12 months’ worth of your bank statements. If you have another way to prove receipt of your income, you will have to run it past your lender to see if they will accept it.

That being said, applying for a subprime loan can be done online with a variety of lenders; over the phone; or in person. The best thing you can do is contact at least 3 lenders to see what your options are since you are not taking on a standard loan. Because subprime loans do not fall under the QM guidelines, there are fewer restrictions the lender must abide by, which could mean higher fees and different terms. This is not to say that any lender will take advantage of your situation, but it does mean that you should shop around and compare all aspects of the loans offered to you so that you can determine which would serve your financial purposes the best, not only now but in the long run as well.

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What is a No-Income-Verification Loan?

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What is a No-Income-Verification Loan?

Today, a no income verification loan differs from what it used to be before the housing crisis. Rewinding to 8 to 10 years ago, a no income verification loan meant that you did not have to provide anything but great credit to a bank in order to obtain a loan. After the housing crisis and the overabundance of foreclosures on the market, those loans became a thing of the past. Today, they are slowly making a comeback, but they are much different than ever before.

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What does No Income Verification Mean?

Today, no income verification means that you are more than likely self-employed and cannot easily verify your income. If your tax returns show a much lower income than you make today, you might be eligible for this type of loan, assuming you have excellent credit. Lenders need some type of reassurance that you are a low risk – they cannot just hand out a loan without full verification of your income without knowing that you are financially responsible. Today, no verification of your income means that you either do not provide your tax returns, but rather provide asset statements and excellent credit. In some cases, however, it could mean that the lender asks for access to your tax transcripts via an executed IRS Form 4506.

What Type of Equity Must you Have?

The best way to get approved for a no income verification loan is to have a large amount of equity in the property. This can mean one of two things:

  • If you are purchasing a property, you need to be able to put a large amount of money down on the home. This means more than 20 percent, which is the standard requirement; it means closer to 40 percent if you want a bank to take you seriously.
  • If you own the property and need to refinance, you need to have at least 40 percent equity in the home in order to qualify in most cases.

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Employment still Verified

What no income verification loans does  not mean is that the lender will not verify your employment. You must be employed or self-employed and be able to verify it. If you are employed, you must work on commission or mostly bonuses if you want to use the no income verification loan. Otherwise, it would be like lying on your application if you do not want the lender verifying your income. On the other hand, if you work on commission or bonus, your tax returns could report a much lower amount of income than you actually make because of the number of expenses and other write-offs you take advantage of in order to lower your tax liability. In this case, the lender can verify your employment, rather than your income.

If you are self-employed, the lender can still verify your employment. This can be done in one of two ways:

  • Provide your license to operate the business – If your business requires any type of specific licensing, you can provide it to the lender for proof of your business. Typically, the lender will require a little more verification as well, such as receipt of income from the company in your bank account or even bank statements from the company in your name.
  • Provide a letter from your CPA – The best way to verify your self-employment is by providing a letter from your CPA on his letterhead. The CPA must state that he handles your finances for the business and that you are in fact, in business for yourself.

Compensating Factors are Important

One of the most important things you can do for yourself when you try to obtain a no income verification loan is to have compensating factors. The given requirements include excellent credit and adequate equity in the property. Beyond that, however, you can provide the lender with other reasons to take a chance on you. These compensating factors can include any of the following:

  • A housing history with no late payments in the past few years. This shows your financial responsibility towards your housing liabilities.
  • No collections or judgments on your credit report to further your ability to show your financial responsibility.
  • Reserves on hand in your checking or savings account that equal 6 to 12 months’ worth of mortgage payments also show financial responsibility.
  • Long-term employment that you can verify. The longer you have been at the same employer, the less risk you pose to the lender.

The bottom line is that you have to look at the entire picture when it comes to applying for a no income verification loan. You cannot expect that just because you have good credit that you will get approved. The lender will need to see an entire financial picture that shows responsibility and very little risk. The best way to do this is to borrow as little as possible, which means saving up in order to have a large down payment or waiting until you have extensive equity in the home that you own before you refinance. In addition, the more stability you can show with your employment, whether you work for someone or yourself, can further your likelihood of getting approved. The more compensating factors you have to make up for the fact that you cannot fully verify your income, the better. In some cases, borrowers can replace their standard income documents with asset statements, showing receipt of the income, while other times, even that is not possible.

Whatever the case may be for you – embrace what you have and showcase the positives to a lender. The more you work on your credit and your savings, the better time you will have with any lender. The good news is, however, that there are plenty of lenders out there that are handing out no income verification loans today – you just have to be able to appeal to what they are looking to fill. If one lender turns you down, do not give up – keep shopping until you find a lender that your attributes meet.

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How to Find Lenders that Offer Non-QM Loans?

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How to Find Lenders that Offer Non-QM Loans?

Non-QM loans are something that came about a few years ago after the Dodd-Frank Act went into effect. Non-QM loans are essentially loans that do not meet the Qualified Mortgage Guidelines. If a loan does not meet the QM guidelines, it cannot be sold to Fannie Mae or Freddie Mac. This greatly lowered the number of lenders that offer these types of mortgage, but it did not diminish them altogether – there are still plenty of lenders that offer them because of their profitability and basic ability to help potential borrowers become homeowners.

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What is a Non-QM Loan?

Basically, a non-QM loan is almost any non-conventional loan on the market, but even some conventional loans might not meet the requirements depending on the fees the lender charges. Typically, a non-QM loan does not meet the following guidelines:

  • Fully amortized loan (no interest-only payments or negative amortization)
  • No balloon payments
  • No loan terms in excess of 30 years
  • No excessive upfront fees or discount points (no more than 3% of the loan)
  • Debt ratio lower than 43%
  • Fully documented income

As you can see, these terms leave out people that would need any type of assistance in obtaining a loan. For example, self-employed borrowers that do not have enough income on standard income documents to qualify for the loan would be left out. Luckily, there are non-QM loans that lenders offer that are either sold to private investors in the secondary market or kept on their own portfolios.

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Meeting the Ability to Repay Rule

One factor that both QM and non-QM mortgages have in common, however, is the need to meet the Ability to Repay Rules. These rules state that the lender did everything possible to determine that the borrower can, in fact, afford the loan. This is especially important with low doc or stated income loans, as the lender is not using the standard format to verify the income. The lender needs to go to great lengths to determine without a doubt that the loan does not put the borrower under any type of financial hardship. Basically, the lender needs to evaluate the following:

  • The income and/or assets that the borrower will use to pay the mortgage, ensuring that they are legitimate and likely to continue
  • Verify employment
  • Full mortgage payment including principal, interest, taxes, and insurance and how they compare to your monthly income
  • Any other debts that are incurred on a regular basis
  • Residual income
  • Credit history

When the lender evaluates every area above, whether in the standard format or with their own requirements as they relate to a stated income loan, they can properly determine if the borrower can afford the loan and avoid the disaster that the mortgage crisis caused with the large number of stated income and no doc loans that were provided.

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Finding a Non-QM Lender

Finding a non-QM lender is not as hard as it was in the early days after the financial crisis. More and more lenders are opening up to the possibility of a non-QM loan. Typically, you should start with private lenders, as they have the capability of flying under the radar with Qualified Mortgages. They often create their own programs and hold the loans in their own portfolio, which gives them much greater flexibility than any other bank would have that must follow the QM loans if they want to sell their mortgages to Fannie Mae or Freddie Mac.

The best way is to start with smaller lenders in your local area. Talk to them about your specific situation to see what they may have to offer. You might be pleasantly surprised to find out that they do not follow the conforming cookie cutter approach to mortgages. If those banks do not have what you need, start looking outside of your local area at smaller banks across the nation. Any bank that caters to self-employed borrowers or borrowers that have a blemished credit history are your best bet for this type of loan, even if you are not self-employed or have a blemished credit history.

You might have your own reasons for requiring a non-QM loan, such as a debt ratio that exceeds 43%. This is not always a bad thing, sometimes there are special circumstances that put you just outside of that debt ratio, but if you have compensating factors that make up for the risk, some lenders will let it slide through. The problem is, however, that you cannot get a QM because of the excessive debt ratio. In this case, you need a lender willing to take a riskier loan and either keep it on their books or sell it to a private investor.

What it comes down to when finding a non-QM lender is plenty of homework. You are not going to find a lender as easily as you would with a QM loan since every lender provides those types of loans. Think of it as a specialized loan that you need to find the perfect lender to provide for you. In general, a lender that plans to keep the loan on their own books will give you the most flexibility because they make up their rules; there are no investors to please. If the lender will sell the loan on the secondary market, however, they will have to abide by the investor’s rules in order to ensure that the lender purchases the loan in the end.

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

You might have heard of the stated income mortgage as being a “ self-employed” person’s mortgage, but in reality, it is not the only way for self-employed borrowers to get a loan. The only reason that borrowers that work for themselves must use a stated income mortgage is when they cannot fully verify their income. This is usually due to the fact that these borrowers write off a great number of expenses on their tax returns in order to lower their tax liability. While this helps in terms of paying their taxes, it makes their income look lower to the lender, making it hard to qualify with a higher debt ratio and low income. If on the other hand, your self-employment is fully verifiable, you are more than welcome to apply for a fully documented loan, just be aware that you will have to provide all schedules of your tax return in order for the lender to properly determine your average income. Typically, lenders take a two-year average of self-employed income, which means if the year before last year you had a rough year, yet last year was great, the average income will be lower than you anticipated the lender using.

What’s the Difference Between the Mortgage Types?

There are a few differences between the stated income mortgage and a fully documented mortgage. They are as follows:

  • The most obvious difference is the way you verify your employment; with the stated income loan you do not verify your income and with a fully verified loan, you document your income
  • The interest rate is typically higher on a stated income loan because it poses a higher risk to the lender, which means a higher interest rate
  • There are fewer lenders that offer the stated income mortgage than offers fully verified FHA, VA, or conventional loans

Both mortgages enable you to purchase a home and give the same types of terms, including 15, 20, or 30-year fixed terms as well as several adjustable rate terms. The largest difference, in the end, is usually the interest rate and the fees charged.

What does the Mortgage Lender Need?

If you are self-employed, you will need to provide the lender with different documentation than you would if you were a salaried employee. Typically you will need to provide the following:

  • Tax returns for the past two years
  • Bank statements for the last 12 months for both personal and business accounts
  • Letter from your CPA verifying that you are in business for yourself
  • Proof of the license for your company
  • An executed IRS Form 4506

The lender will take these documents and evaluate your income to determine if you qualify for a fully documented loan. The income will usually be taken as is, meaning the bottom line after you write off all of your expenses, but there are some exceptions to the rule:

  • Depletion
  • Depreciation
  • Large expenses that are non-recurring

If you have any of these expenses written off on your taxes, you might be able to add them back into your income, to help make your income higher. This is one of the reasons you should always talk to your lender about your ability to use a fully documented loan – if the lender allows specific expenses to be added back into your income, you might qualify for a fully documented loan, saving you plenty of money down the road.

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How you can Plan

The good news is that you can plan ahead for your desire to obtain a mortgage. This is especially important if you are self-employed. If you know that you plan on purchasing a home in the next year or two, consider your choices for tax filing this year. While you might save some money on your tax liability, you will likely pay the price by having to take on a stated income loan, which means more fees and a higher interest rate. It pays to do the math ahead of time. If you plan on staying in your home for a long time, you will want to do whatever you can to obtain a low-interest rate. In some cases, this could mean lowering the amount of write-offs you take in order to maximize your qualifying income. The higher your income, the more likely it is that you can use a fully documented loan, rather than a stated income loan.

Another way to plan is to start saving as much money as you can. The higher the down payment that you have, the lower risk you pose to the lender. In addition, once you put the desired down payment down, if you have reserves on hand, you can use them as a compensating factor to help you qualify for the loan. Even if you have to take a stated income loan because your income does not look high enough on your tax returns, having six to twelve months’ worth of reserves on hand helps to lower your risk. This means that the lender will likely be able to provide you with a lower interest rate, saving you money in the long run.

Talk to your lender to see what you might qualify to receive given your self-employment income. If you draw a salary on a regular basis, it might be easier to qualify, but even if you do not, there are ways to maximize your qualifying income so that you can use a fully documented loan. If you must take a stated income loan, just make sure to shop around with different lenders. Some lenders will be able to take higher risks and not have to change you as much as other lenders charge. Remember, you can always negotiate different fees and interest rates as well – do not just settle for the first quote you are provided, you have the right to shop around and negotiate until you get the terms you think are most affordable.

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Which VA-Guaranteed Loans Would be “Qualified Mortgages” or “QMs”

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Which VA-Guaranteed Loans Would be “Qualified Mortgages” or “QMs”

Qualified Mortgages or “QMs” have become the talk of the town in the mortgage industry. This all came about in the wake of the mortgage crisis. Lenders that were supplying loans to unqualified borrowers were what set the mortgage industry into a tizzy. In an effort to halt that from occurring again, the government put forth strict rules that all mortgage agencies must follow, including the VA. The government agencies that include the FHA and VA, however, were allowed to create their own rules regarding the Ability-to-Repay and QM rules. In general, the VA has claimed that all VA guaranteed loans fall under the QM status – what varies is to what degree they fall under it.

Understanding QM Loans

Qualified Mortgages or “QMs” are those mortgages that are exempt from any type of borrower litigation against the lender. They are protected because the lender can guarantee without a doubt that the borrower can afford the loan. This way, if down the road, the borrower becomes unable to afford the loan, it is not because of any fault of the lender – the lender did its due diligence in determining the affordability to the borrower. There is another aspect to the QM loan, however; this is called the Rebuttal Presumption Status and it differs from the Safe Harbor Status, which is when the lender is completely exempt from the possibility of litigation.

The Rebuttal Presumption Status still allows a borrower to stake claim against the lender, stating that the lender did not do their part in determining the affordability of the loan. There is slightly less protection to the lender with the Rebuttal Presumption Status.

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How VA Loans can Gain Safe Harbor Status

Every standard VA guaranteed loan has Safe Harbor Status because all aspects of the loan are evaluated before funds are disbursed. This means the lender and the VA can without a doubt confirm that the income, debt ratio, costs, and benefits of the loan are good for the borrower. These rules even apply to the VA IRRRL program as long as the following requirements are met:

  • At least six payments must have been made on the current VA loan
  • Only one late payment on the current VA payments is allowed in the last 6 months (or 12 months if the loan has been in existence that long)
  • The time that it takes to make up for the costs of the refinance versus the savings on the mortgage payment cannot exceed 3 years
  • The loan meets the requirements to dismiss income verification or the income is verified appropriately

Any VA IRRRL that does not meet the above requirements would fall under the Rebuttal Presumption Status, giving the borrower a little more leeway in going after the lender should they default on their loan. The most common examples include loans that are not at least six months old or those that have excessive fees that take longer than 36 months to recoup.

In order for a VA IRRRL to not require income verification, there must not be more than one late housing payment in the last 12 months; the principal balance must remain the same or lower (not higher); the costs for the loan do not exceed 3 percent of the loan amount; the interest rate is lower; and there are no risky amortization features. If a loan does not meet these requirements, the income must be verified in order to be a Safe Harbor Loan.

In summary, all VA loans are a QM loan, the degree just varies. The good news is that every borrower has some type of protection and the VA is very careful about who they lend to and how much they lend so as not to put any borrower in danger of losing their home.

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Role of Non-Qualified Mortgages in Residential Home Lending

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Role of Non-Qualified Mortgages in Residential Home Lending

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.

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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.

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What Makes a Good Candidate for Non-Qualified Loans?

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What Makes a Good Candidate for Non-Qualified Loans_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.

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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.

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What’s the Catch with the Availability of Subprime Loans Today?

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What’s the Catch with the Availability of Subprime Loans Today-

Subprime loans seemed to have gone away forever after the housing crisis. After all, who would want to lend money to someone that cannot verify their income and risk facing default again? Certainly, none of the big banks ever want to go through that again. And the government even made sure that it was not possible with the new Dodd-Frank Act of 2010 and the Ability to Repay Rules that both made sure that the lender not only verified the income of every borrower but also ensured that they would be able to afford the loan well into the future or take the risk of the borrower being able to take legal action against the borrower. All that being said; however, subprime mortgages are making a comeback – so what’s the catch?

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More Requirements

There really is not a “catch” per se when it comes to subprime loans – they are simply an option for self-employed or heavily commissioned borrowers to get a mortgage. But just because they are able to state their income does not mean that they do not have to verify other things to ensure the validity and solidity of their application. Every borrower that states his/her income will have to have the following things evaluated:

  • Credit score – Most lenders want a credit score over 680, but every lender differs; some will be higher and others will be lower.
  • Assets – Every borrower will have to have assets and be able to verify them. These assets are how the lender determines if the income you state is true or not. For example, if you state that you make $100,000 per year, yet you have very little money in your bank account and no other assets to speak of, that $100,000 per year will be hard to prove. If you can prove the income, then it might make the lender think that you are in over your head as it is and cannot take on a new mortgage.
  • Employment – Someone has to verify your employment, even if you are self-employed. If you work for someone and make more than 25 percent of your income in commission, then your employer can verify your employment. If you are self-employed you can provide a valid business license or a letter by your CPA on his letterhead validating the existence of your business and the length of time it has been in operation.

In addition, you will likely need to put down a higher down payment. It would be hard to find a lender that would be willing to settle for the 3% down payment that you could find on a conventional loan with full documentation. Generally, you will have to put at least 20 percent down, but sometimes even more, depending on your risk levels and the risks the lender wants to take.

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Higher Rate

One thing that really stands out on the subprime loans is the higher rate you will have to pay. This is not to say that you will have an extraordinary rate if you are self-employed, though. Every loan has a different rate that is based on the following things:

  • Credit score
  • Amount of assets
  • Length of employment or self-employment
  • Debt ratio
  • Level of risk that you bring to the lender

There are adjustments for every category. For example, if your credit score is near the lower end of the threshold that the lender allows, then you will likely have a hit on your interest rate for that. In addition, if you are putting a lower down payment down or are new to the line of business that you are in, there will be slight adjustments in your interest rate for that.

Every lender differs in what they require and offer to each borrower. Make sure that you shop around with various lenders if you are interested in subprime loans. They are nowhere near as difficult to find today as they were in the past, so make sure you ask around in order to get the loan with the most attractive terms for yourself.

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Is a Stated Income Loan Suitable for Your Situation?

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Is a Stated Income Loan Suitable for Your Situation

Stated income loans used to be so commonplace prior to the housing crisis. Since then they pretty much disappeared for many years. This left people with less common methods of income production without home loans because they could not meet the requirements of conventional loans, especially their new stricter standards. The Dodd Frank regulations made things even more difficult for these borrowers as every loan now needs to pass the Ability to Repay Rule in order for banks to be protected from litigation as well as to be able to sell the products on the secondary market. Since the economy has made a comeback, however, a few lenders have dabbled in stated income loans again. They are not the loans you would have found in the market a few years ago, but they are still a great way for the self-employed or commissioned borrower to get a home loan.

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Credit Guidelines

Credit scores are often the bane of existence of mortgage programs. If you don’t have the minimum score, you can count yourself out of the program. This is not necessarily the case for state income loans; however, you do need to have good credit in order to qualify. What good credit means depends on which lender you are talking to, though. Because stated loans pose a greater risk to the lender because the loan must remain on the books of the lender providing the loan, any way that the lender can minimize your risk of default, they are going to take. The easiest way to do this is to limit the number of low credit scores they allow. As a general rule, lenders require a credit score of at least 700 to qualify for the program. As with any program, however, there are exceptions. If you are able to make up for the lower credit score with excessive reserves (more than the required 12 months); a large down payment; and minimal current debts, you might be able to get away with a lower credit score.

Income Guidelines

It might seem out of the scope of the program to require borrowers to verify income in order to qualify for stated income loans, but it is a necessity as that is what got banks in trouble in the first place. It is one thing to provide a loan that allows a borrower to state their income and verify it with alternative documents rather than a standard paystub, W-2, or tax return. What got the industry in trouble was the lack of verification these loans had before. Borrowers were able to state their income and get a loan based off of that if they had the credit score to back them up. Today, these loans with the same name, have a completely different verification process. You still have to be able to verify your income, but it can be with a different document, such as your bank statements. While the lender will not see a deposit from XYZ Company every two weeks for your paycheck; they will be able to see a pattern in your deposits and withdrawals over the period of a year or two. This enables the lender to see how much money you bring in and pay out; helping them to determine if you can in fact, afford the new mortgage.

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Down Payment Requirements

How much you put down on a home purchase helps to dictate its risk level. The less money you put down, the less you have invested in the home. If you were to run into financial difficulty down the road and have little invested in the home, then you could end up giving up on the home, leaving it in the hands of the bank. This is a large reason why lenders require large down payments for stated income loans. Typically, 30 percent is the minimum, but you will find different programs with every lender. Your credit score, amount of stated income, and the purchase price of the home will help to determine what level of a down payment the lender will be willing to accept. Remember that the more you are willing to put down, the less risky your loan becomes.

Investment Home Requirements

One area that the Dodd Frank regulations do not hit is with investment homes. Owning an investment home is considered a business, rather than anything else. This means that the same rules do not apply to you, enabling you to obtain this type of loan for your real estate investment business. As with any owner occupied property, however, you will have to prove your worthiness for the loan. You cannot just state your income and the fact that you plan to purchase the home for investment and get it – you have to qualify for it with good credit, plenty of reserves, and verifiable income in your bank statements. Because the Qualified Mortgage guidelines to not apply to you, this loan could be sold on the secondary market, enticing more lenders to provide investment home loans for qualified borrowers.

As is the case with any loan, there are restrictions on who qualifies. Banks today want to be much more careful than ever before in order to avoid the chance of homes being foreclosed upon. Contrary to popular belief, banks do not want to take possession of a home; they would rather find a way to get the borrower to be able to afford the payments. When a bank has to take a home back it takes up a lot of their resources, not to mention funding. All lenders today will be careful who they provide stated income loans to, but at the very least, they are a great way for people that were forced to become self-employed or to take on a commissioned job to become home owners once again after they get their finances in order and are able to prove their worthiness in other ways than the standard income verification that most loans require.

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