Non-Qualified Loan

Understanding ITIN Loan Programs

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Foreign nationals often want to set down roots in the United States. Most loan programs require a social security number, which you don’t have. This may make you feel like it’s impossible to get a mortgage, fortunately, there are ways around it. If you have an ITIN, and you meet the loan requirements, you may secure the financing you desire for a mortgage.

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Credit is Important

Before lenders will approve you for a mortgage, they need to see your financial habits. Do you pay your bills on time? Do you overextend your credit? Lenders need these answers.

The only way to get those answers is with a credit history. Without a social security number, though, you won’t have one. Fortunately, many creditors extend credit with just an ITIN.

We recommend starting small. Apply for a secured credit card, which is a credit card with a deposit. The credit card company reports your credit card usage and payments to the credit bureau in exchange for a deposit on your account. The credit card company will give you a credit line equal to the deposit. If you put $100 down, you get a $100 credit line.

As you use your credit and pay your bills on time, you will build up credit. You may want two of these trade lines just to build up your credit. Once you establish yourself for six months or so, apply for an unsecured credit card or personal loan. Keep your loan amount request small, but see if you can get any other type of loan that will help build your credit.

As you continue to pay your bills on time and use your credit responsibly, you’ll obtain a credit score that shows financial responsibility.

Stay Employed

Lenders also put a lot of emphasis on your employment. They want to know that you’ll be at the same job for the foreseeable future. Because you are an ITIN borrower, you already pose a risk of default. Lenders like to see at least a 2-year stable employment history when you don’t have a social security number.

In addition to your work history, you must prove your work ‘future.’ Because you are a foreign national, lenders care about your plans. Will you be here next year? Will you be here in three years? Most lenders require an employment contract that goes through at least the next three years. If you don’t have a contract good for at least three years, it could make it harder to get an ITIN mortgage.

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Make a Large Down Payment

Unfortunately, as an ITIN borrower, you’ll need a larger down payment than borrowers with a social security number. As a general rule, plan on at least a 20% down payment. In some cases, you may need more. Lenders determine the required down payment on the riskiness of your loan.

For example, if you have a low credit score, you will need a larger down payment than someone with a higher credit score. You’ll also need a larger down payment if you have a lot of outstanding debt compared to your gross monthly income.

The down payment helps offset the risk of default. The lender knows that there is at least a little equity in the home. If you stop making your payments, the lender can sell the home for a profit and keep the funds as repayment.

Before you use funds for a down payment, you have to show its origination. In other words, you need a bank account here in the United States. You also need to be able to show regular deposits. It’s best to have your income deposited directly into your account. It’s easy for lenders to source (your paystubs) and it’s consistent. Lenders want the money in the account for at least two months before they will count it for your down payment. This way they know the money didn’t come from another loan as it would show up on your credit report.

Save Monthly Reserves

In addition to your down payment, you need money in a reserve account. Most lenders require six months’ worth of mortgage payments in your savings account or any other liquid account. If your mortgage payment were $1,200, you would need at least $7,200 in a bank account. If you run into financial trouble, the reserves are there to bail you out. Lenders rely on the reserves, so the more money you have on hand, the higher your chances of securing approval.

Have Compensating Factors

Lenders look for any compensating factors that make up for the risk that being an ITIN borrower pose. The compensating factors could be any of the following:

  • High credit score
  • Low debt ratio
  • More than six months of reserves on hand
  • Long work contract

Try to offset the riskiness of being an ITIN borrower by providing as many positive factors as you can. The more reasons a lender has to trust that you won’t default on your loan, the more likely you are to get the mortgage approval.

ITIN loan programs often foreign nationals a way to buy a home in the United States. With good credit, a decent debt ratio, and enough money saved, you should be able to get the loan you need to buy a home.

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Understanding the Characteristics of a Non-Qualified Mortgage

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FamilyIf a loan doesn’t meet the Qualified Mortgage Rules, it’s considered a non-qualified mortgage. Understanding the characteristics of a non-qualified mortgage can help you decide if it’s right for you. Nowhere does it state that a non-QM loan is bad. You should just understand what it is though. You should also understand what it means for your financial future before proceeding.

What is a Non-Qualified Mortgage?

Let’s start with this. A non-qualified mortgage is not necessarily a high-risk loan. Basically, it’s a loan that doesn’t meet the Qualified Mortgage Guidelines. So let’s look at what those QM guidelines are:

  • no more than 3 points charged upfront
  • doesn’t exceed a 30 year term
  • fully amortizes principal and interest
  • doesn’t have negative amortization
  • debt ratio that doesn’t exceed 43%

So as you can see a non-QM loan could simply be an interest only loan. Does this make it bad? It doesn’t. It just doesn’t meet the QM guidelines because of the risk of payment shock the borrower might experience.

Who Benefits From the Qualified Mortgage?

Both the lender and the borrower benefit from the Qualified Mortgage.

The lender benefits because they are protected against legislation should the borrower default. As long as the lender follows all QM guidelines they can’t be sued by the borrower. This includes putting forth good effort in establishing the ability to repay the loan.

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The borrower, of course, benefits by securing a loan they can afford. Generally, that’s the idea whether it’s qualified or not. But, there are some extra precautions in place that safeguard borrowers with the QM loan. This doesn’t mean, though, that non-qualified mortgages automatically put a borrower at risk.

The Characteristics of a Non-Qualified Loan

So now let’s look at what the characteristics of a non-qualified loan look like:

  • Interest only loans – Despite the housing crisis being blamed on loans like the interest only loan, they still exist. The primary borrowers with this type of loan are the wealthy investors. They often flip homes and don’t need to worry about paying down the principal. They take the interest only loan to help them have cash flow while they fix the home up. Once they sell it, they pay the loan off.
  • Stated income loans – This is another type of loan that many put the blame for the housing crisis on. Today’s stated income loans aren’t the same, though. They are more like an alternative documentation loan. Rather than “stating” income, borrowers provide different documentation. For example, rather than paystubs and W-2s, they might provide bank statements. The income is verified, just in a different way.
  • Verified asset – Borrowers that don’t have a current income but have enough assets to cover the mortgage payments may use the Verified Asset program. This is a non-qualified program since the lender doesn’t directly verify income.

The basic characteristics of a non-qualified loan are those that make it a risky loan. A few other examples include loans given to borrowers who recently had a bankruptcy or foreclosure. Lenders that allow a shorter waiting period than the standard FHA, VA, and conventional guidelines fall under the non-QM category.

The largest category of borrowers that take out a non-qualified mortgage, however, are the self-employed borrowers. These borrowers may not have the paperwork showing the income they actually make. Or they make less on paper than they truly bring in. The most common issue is the borrower that is self-employed for less than 2 years. Most FHA and conventional lenders won’t be able to accept this income. A non-QM lender would be able to, though.

You could call these loans “subprime,” but they really aren’t. They are just loans provided by private lenders that choose to carry the loans in their own portfolio.

All Loans Must Meet the Ability-to-Repay Rules

No matter what type of loan you take out, it must meet the ability-to-repay rules.  Basically, this means the lender made a good faith effort in determining that you can afford the loan.

The method the lender uses depends on the lender’s own requirements. In a perfect world, this means documenting income and assets. But when that’s not the case, the lender must use adequate effort to make sure the loan is affordable. In addition, the borrower must make sure the fully amortized payment is affordable. This is the case in interest only loans as well as adjustable rate loans. Lenders can’t use the teaser rate to determine if a borrower can afford the loan.

Maximizing the efforts to make sure borrowers can afford a loan can help minimize default. As you can see, the characteristics of a non-qualified mortgage aren’t bad characteristics. They are just alternate ways to help borrowers get a loan that they can afford.

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPB

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPBThe Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.

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Verification of Income and Assets

The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.

To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).

(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.

The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.

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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.

Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.

Downpayment not an Asset

In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.

The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.

A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.

“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.

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