Non-Qualified Loan

How to Manage your Debt Ratio to Obtain Bank Statement Loans

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Are you recently self-employed? Maybe it occurred as a result of the economic disaster that occurred after the housing crisis of 2007. Whatever the case may be, if you own your own business and are making a good living, you are back on the track to good things. What if you obtained your mortgage right before the housing bust and took an adjustable rate mortgage that is about to adjust now and you need to refinance? Your situation is completely different, going from someone’s employee to self-employed. In the eyes of the bank, this is a riskier move, but that does not mean it is impossible to refinance. There are many lenders out there willing to help you out, but you should do these three things first to make sure you are good and ready.

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Make your Business Legitimate

Your business might seem legitimate in your eyes, but in the eyes of the banks, it is not until you do a few things:

  • Have a licensed CPA prepare your taxes right from the start, if you can. If you have already been in business for a while, get a licensed CPA right away. This ensures that a non-interested third party handles your income and can vouch for the validity of it.
  • Have a business license with your name on it. It is not enough to hang a shingle outside and call yourself a business. You have to be a legally recognized business, which is done by registering your business and receiving a license to prove it.
  • If you do not have a business license or your business does not need one, be prepared to have your CPA write a letter on his letterhead stating that you have been in business for the last 2 years or longer and that he has been handling your taxes for that period of time.

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Have High Credit Scores

This could be the hardest step when trying to refinance as a self-employed borrower. Your credit scores probably took a hit as you started your business. With extensive credit being granted, applications being filled out, and money flying around, your credit score is likely to be all over the place. Generally, lenders want self-employed borrowers to have a credit score over 700. There are simple ways to get this going on your end if you are not there right now:

  • Minimize your utilization rate, which means try to pay down as much of your debt as possible. Using more than 30 percent of your available credit gives your credit rating a good beating.
  • Make your payments on time all of the time, especially any housing or installment payments.
  • Take care of any collections or judgements reporting on your credit report, whether you have to pay them off or just straighten them out, getting them removed from your credit report if they were already satisfied.

Save Money

Money talks in the mortgage industry. The more liquid money you have available and can prove to a lender, the less risky you become. Being self-employed adds a layer of risk to your mortgage application because you do not have steady income, like you would have if you were a salaried employee. Because of this, lenders need factors that will make you less risky – or factors that will help you continue to make your mortgage payments should your business suddenly begin to falter. Liquid assets, meaning money that is not tied up in any type of investment or collateral can serve as a compensating factor, lowering the risk your self-employment brings. If you do not have adequate savings yet, start saving now and wait to refinance until you have several months to one full year’s worth of reserves on hand.

Lenders want to see that the self-employed have their ducks in a row, so to speak. They want to know that you are not a high risk and that you can continue to pay your mortgage no matter what is going on in your business world. When you have a third-party to vouch for you; have high credit scores; and have plenty of reserves, there are many options for a self-employed mortgage out there for you. Whether you get a stated income loan, bank statement loan, or qualify for a conventional loan with your last two years’ tax returns, there are many alternatives out there – start getting yourself ready today so you can apply!

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3 Things the Self-Employed Need to do in Order to Refinance

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The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.

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Refinance your Debts

You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:

  • Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
  • Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.

When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.

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Pay Debts Off

If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.

Wait Until you are in Business for a While

Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.

Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!

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What Home Loans for Teachers With Bad Credit are Available?

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Teachers with bad credit still have many home loan options. While a high credit score speaks volumes, it’s not the only way to get a home loan. Teachers are eligible for the same loan programsborrowers in any other profession can get. In addition, though teachers may be eligible for some ‘special programs’ that make homeownership more affordable.

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FHA Loans are a Good Fit

Oftentimes teachers with bad credit turn to FHA loans. As long as you have at least a 580 credit score and 3.5% to put down on a home, you may qualify. Teachers can get a home with little money down and as much as a 41% total debt ratio.

FHA loans do charge mortgage insurance for the life of the loan, so keep that in mind. You do have the option to refinance at any point, though. Once you improve your credit score, and owe less than 80% of the home’s value, you can refinance into a conventional loan and ditch the insurance.

If you are a teacher with a credit score between 500 and 579, you may still qualify for an FHA loan. However, you’ll need at least a 10% down payment. You’ll also go through what’s called manual underwriting. Rather than a computer underwriting your loan, a person will do it. That person will go through your file with a fine-toothed comb, so to speak.

With a 500 – 579 credit score, you may need compensating factors. These qualifying factors help make up for the risky credit score. A few examples include:

  • Low debt ratio – If you only have a few debts, you leave more money available to make your mortgage payment. This lowers your risk of default, which lenders like to see, especially with a low credit score.
  • High down payment – Even though FHA loans only require a 3.5% down payment, you can make a larger down payment. Investing your own money shows your desire to be a homeowner and make your payments on time. If you don’t, you risk foreclosure and losing your entire investment.
  • Stable employment – Lenders like reliability and consistency. If you change jobs often, they won’t have that feeling of consistency. If you stay at the same job for many years, though, you show lenders that you are reliable, which lowers your risk of default.

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USDA Loans are Good for Rural Areas

The USDA loan is another government-backed program. You must live in a rural area in order to use this program, though. Your total household income also must not exceed 115% of the average income for the area. You can see if you are eligible here.

The USDA does have slightly higher credit score requirements, though. You need a 640 credit score. But, you don’t need a down payment. You can borrow up to 100% of the home’s value. While the credit score requirements are higher, they aren’t as high as conventional lenders require and you could save money without a down payment requirement.

USDA loans are for modest homes. They do charge mortgage insurance, but it’s only 0.35% of the loan amount each year. On a $150,000 loan, you would pay $43 per month in insurance.

Subprime Loans

Finally, you may want to explore your subprime options. These loans come from smaller lenders in your area that keep the loans on their own books. Subprime lenders create their own guidelines and rules. They can accept low credit scores, high debt ratios, and low down payments. Each lender has their own programs, so shop around to find the one that suits you.

Read the fine print when looking at subprime loans. Make sure you know the interest rate, term, closing costs, and any other terms of the loan. Is the rate fixed or is it adjustable? Will you pay points to get the loan? Is there a prepayment penalty?

The Teacher Next Door Program

HUD also offers the Teacher Next Door Program. It’s an extension of the FHA loan, but it comes with great rewards. Teachers and other service-oriented individuals, such as police officers and firefighters are eligible for this program.

HUD designates specific properties in the area that qualify for the program. They are foreclosed homes in an area that could use a positive influence to boost the economy. If you win the ‘lottery’ to buy the home, you only need $100 down on it. You must have FHA financing and agree to live in the home for at least 3 years. If you do, HUD writes off half of the cost of the home after three years.

This means after three years you could sell the home for its value and make a 50% profit or more. Because you only need FHA financing to buy the home, even teachers with bad credit may qualify.

Teachers with bad credit have many options for home loans. The key is to shop around and see what options are available to you. Get offers from at least three lenders to see which lender/loan program will give you the best deal.

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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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The Auto Lending Industry is Tightening Credit, How About Mortgages?

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Slowing demand in cars is causing automakers to cut down production to balance the rise in available inventory. April is the fourth month in a row where automakers report poor sales. Apparently, fewer Americans are buying cars now. But what caused this?

The possibility for disaster

You might be familiar of the subprime auto loan crisis that has recently grabbed headlines. A quarter of the American auto loan debt of $1.2 trillion is lent to high-risk borrowers or those who have not-so-stellar credit scores. As the panic sinks in among lenders, many tried to mitigate disaster by setting stricter guidelines and qualifications on their loan services and products. Now, a third of new auto loan originations are given to borrowers with FICO scores 720 and up.

The tightening of credit, along with the rise in interest rates is making it harder for many potential borrowers to get financing for their vehicle-buying intent. Many are reconsidering their intention to buy new cars, with others just settling for used ones.

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But the question right now is: is the mortgage sector following the auto loan sector’s example?

A new report from the Federal Reserve’s Senior Loan Officer Survey has shown that commercial real estate lending standards tightened in the second half of 2016 following a warning by the Office of the Comptroller of the Currency regarding the easing of loan standards for mortgage originations. An analysis of a sample of fusion commercial mortgage-backed securities spanning the period of 2012 through the first quarter of 2017 also showed a significant drop in LTV (loan-to-value) ratio this year which indicates that commercial mortgage-backed securities lenders are tightening credit as well.

Not again

Remember that the boom of subprime mortgages caused the collapse of the housing market and paved the way for the Great Recession back in 2008. Of course, nobody would want to take that disastrous dive once more. Still, this does not prevent many other private players from taking advantage of the lack in competition. Those who choose to do so are racking up $20.4 billion last year alone, a significant rise compared to $12.2 billion the previous year.

Not plunging into crisis is a collective effort. But in this game of risk and rewards, the intent is always individually-motivated. Are we mature enough as a collective to never make the same mistake twice?

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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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The Quest for Finding Non-QM Borrowers

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The Quest for Finding Non-QM Borrowers

Non-qualified loans make up 9% of the total mortgages originated in 2016. This goes to show that there is a market, a demand for non-QM loans among today’s homebuyers. The question is: who are these potential borrowers of non-QM loans? Where can loan officers find such non-QM borrowers?

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Identifying Non-QM Borrowers

Angel Oak, a wholesale lender who originates and services loans and sells them on the secondary market, is offering solutions geared toward tapping this “ massive untouched market” of potential borrowers of non-qualified mortgages.

These non-QM loan borrowers may have these characteristics:

  • Don’t qualify for agency loans backed or guaranteed by GSEs, Fannie Mae and Freddie Mac or GOCs like Ginnie Mae.
  • In self-employment.
  • Need alternative documentation for income verification.
  • Have low FICO scores.
  • Have a recent derogatory record, e.g. foreclosure, bankruptcy.

Qualifying These Non-QM Borrowers

Aside from opening the credit box for non-QM borrowers, loan officers offering nonqualified loans in their portfolio can increase their competitiveness in the mortgage market.

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According to Angel Oak, who recently completed its third non-QM securitization of $146.4 million, finding these potential borrowers is the first step. And they can be found through builders, accountants, realtors, and or financial advisers who closely work with these individuals.

These professionals can be considered as potential sources of referrals. Loan officers will have to educate these professionals about non-QM loans and their specifics. When the time comes that a client of such professionals will need a non-QM loan, they can recommend non-QM loan officers they know to that client.

Loan officers will also be given access to a proprietary tool that speeds up the qualification process. They can input info such as FICO scores, loan-to-value ratio, and loan amount, which can determine if a borrower is qualified for a non-QM. Loan officers can also use this tool to submit mortgage prequalification requests.

For borrowers whose profile might not take them to the traditional mortgage path, non-QM loans represent one possible route they can take. And there are many avenues to explore that option.

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