Non-Qualified Loan

Can You Take Cash Out of an Investment Property’s Equity?

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If you have investment properties that have equity in them, you may want to tap into that equity, and it may not be a bad idea.

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Leaving equity in an investment property may leave money on the table. You can repurpose those funds to fix up the investment property to secure more rent or to sell it for a higher value. You can also use the funds to purchase more investment properties, enhancing your real estate portfolio.

So how do you take cash out of your investment property’s equity? Keep reading to find out more.

Conventional Loans are the Answer

The only loan program that allows you to purchase and/or use a cash-out refinance is the conventional loan. All government-backed loans, including the FHA, VA, and USDA loans are only for owner-occupied properties. Conventional loans are a bit more lenient in that respect, but there are lower LTV allowances and stricter requirements.

We’ll start with the allowed LTV or loan-to-value ratio. Conventional loans allow you to borrow up to 75% of your home’s value if you take a fixed rate loan. If you opt for an adjustable rate loan, you may only borrow up to 65% of the home’s value.

The above guidelines are for Fannie Mae loans. Some lenders offer another alternative – Freddie Mac conventional loans. While Freddie Mac allows the same LTV on fixed rate loans, they do allow investors to borrow up to 75% of their home’s value with an adjustable rate loan as well. Freddie Mac loans are good for borrowers that need that slightly higher LTV.

The Required Waiting Period

One thing you must know about taking cash out of your investment home is that lenders require a waiting period. You must wait six months from the time that you purchase the home to tap into the home’s equity.

You probably think this isn’t a big deal since most people wouldn’t refinance before six months anyway, but it’s a different story with investment homes. Many people buy run down homes as an investment. They put the time and money in to fix the home up and then they want to tap into the home’s equity to take the cash out of it to further their real estate portfolio. You’ll have to wait six months after purchasing the home to do this, though.

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Qualifying for the Cash-Out Loan

Here’s where things get stricter. Because you have two risks at play here, an investment property and a cash-out refinance, lenders have strict guidelines:

  • High credit score – You’ll typically need a credit score around 700 if you want to take cash out of an investment property
  • Good debt ratio – Conventional loans have low debt ratio requirements in order to lower the risk of default. Most lenders allow a 28% housing ratio and a maximum 36% total debt ratio.
  • Adequate reserves – In order to lower the risk of default on your cash-out investment property loan, lenders require that you have reserves on hand. Exactly how much you will need depends on the loan amount and your credit score, but expect to need between 2 months and 12 months of mortgage payments on hand.

Other Options

What happens if you don’t qualify for a conventional loan for a cash-out refinance on your investment property? While you can’t turn to government-backed loans with more flexible requirements, you can turn to subprime loans.

Don’t let the name subprime loan scare you. These lenders have alternative options for people just like you. Unlike conventional loans, there aren’t guidelines that fit all loans. Each lender can set their own requirements since they keep your loan on their own books – they don’t have to answer to any investors. This often means less strict guidelines.

We recommend shopping around with a few lenders. Get quotes for a conventional loan, but also see what other lenders have to offer as well. You may be surprised to find that the subprime loans are more affordable than you thought.

Delayed Financing Options

There is one exception to the Fannie Mae/Freddie Mac rule requiring you to wait six months to refinance. If you bought your investment home with cash, but now want to tap into the equity to either fix up the home or buy another home, you can do so days after buying the home – you don’t have to wait six months.

As long as you can prove that you paid cash for the home from your own funds and that you didn’t use any type of financing, you can get a cash-out loan as soon as you want. This allows you to free up some of your cash in order to further your investment.

The bottom line is that you can get access to your equity in an investment home. Whether you put a lot of money down on a home to buy it or you fix up the home and it increases in value quickly, you can get access to it after just six months as long as you qualify for the loan.

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Common Non-QM Underwriting Guidelines

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You don’t fit the standard mold for mortgage applicants so you think you won’t get a loan. Luckily, there are many lenders today that offer non QM loans. These “non qualified” loans provide borrowers just like you a chance to own a home. You don’t have to abide by the strict qualified mortgage guidelines – lenders are able to make their own rules.

How far can lenders go? Luckily for us, they can’t go too far. They still have to abide by the Ability-to-Repay Rules. Every loan must meet these requirements. If a lender wants to go above and beyond and meet the Qualified Mortgage guidelines, they can. But they are restricted on who they can lend to.

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Here we’ll look at Qualified Mortgage Guidelines as well as non-Qualified Guidelines so you can see how they compare.

Qualified Mortgage Guidelines

Your standard lenders offer what’s called a Qualified Mortgage. In other words, they receive protection against litigation from their borrowers. If a borrower becomes unable to pay their mortgage, they can’t sue the lender for giving them a loan they couldn’t afford.

Qualified Mortgages meet the following requirements:

  • Points and fees on the loan can’t exceed 3% of the loan amount
  • The loan can’t have any type of negative amortization or interest only payments
  • The term may not exceed 30 years
  • The income used for qualifying must be verified with paystubs, W-2s, and/or tax returns

Some borrowers don’t meet these requirements, though. The largest one is the income verification. A good example is a self-employed borrower. If you have only worked for yourself for the last 6 months, you won’t have tax returns providing your income yet. Even if you have been working for yourself for a long time, if you report a loss on your taxes, you can’t support a mortgage payment.

It’s borrowers like these or those that need a unique term that need a non QM loan.

Non QM Guidelines

The non qualified loans have different requirements. In fact, the requirements likely differ from lender to lender. The one thing they all have in common, though, is that they meet the Ability to Repay requirements. Every loan, qualified or not, must meet these requirements.

They are as follows:

  • You supply some type of proof of your income that supports the payment. It doesn’t have to be W-2s and tax returns. You can use your bank statements if they show consistent deposits of your regular income.
  • You supply proof of your assets if you don’t work and will use your assets to make the mortgage payments. You’ll need to provide enough statements to prove to the lender that you can afford the loan even without a job.
  • You’ll need proof of your current employment if you use it for qualifying purposes. If you use your assets instead, you won’t need to prove any type of employment.
  • You’ll need proof that you meet the minimum credit score that the lender requires. There’s no minimum score needed across the board. It depends on the lender and what risks they can take.
  • You’ll need proof that you have the minimum down payment required. Again, this varies by lender. Some lenders allow as much as a 95% LTV, while others only allow 85% or lower.
  • The lender must use the fully indexed interest rate for qualifying. Even if you take an ARM with a lower introductory rate, the lender must determine if you can afford the maximum rate.
  • You must also meet the required waiting period after a bankruptcy or foreclosure. These waiting periods will also vary by lender.

Additional Underwriting Guidelines

That’s not all. The lender must also make sure that you can:

  • Make the monthly mortgage payment (principal and interest) without issue
  • Make the monthly mortgage payment on any 2nd liens you hold
  • Afford your real estate taxes and homeowner’s insurance
  • Afford your current debts alongside your new mortgage; this includes alimony and child support payments
  • Have enough residual income after you pay all of your monthly bills

Again, these requirements may vary by lender. For example, some lenders may allow a credit score as low as 500 while another may require one as high as 620. These lenders keep non QM loans on their books. They don’t sell them to Fannie Mae or Freddie Mac. This means they can accept whatever risk they deem acceptable.

When you apply for a non qualified loan, you’ll go through the same process you would if you applied for a qualified loan. You must provide your personal identifying information. This includes your name, address, and social security number. You must also provide all financial information along with proof to support it.

The lender will run your file through underwriting and determine what conditions exist. Once you know the conditions, you must supply the appropriate proof. The underwriter will review your documents and decide if you can afford the loan.

The Ability to Repay rule works to protect you. Even though it may seem like it adds another layer of requirements onto your loan, it prevents you from taking a loan you can’t afford. If you don’t fit the mold for a qualified mortgage, shop around for a non QM loan. There are many lenders out there willing to supply these types of mortgages today. Shop around and find the best loan for your situation.

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Here Are Tips To Change Your Credit Score For The Better

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Adults

Keeping a good credit score has a lot of benefits other than raising your chances of getting your home loan application approved. Some of its benefits could be that it helps you create a good impression toward future employers and it’s safe to say that it does more good for you than you think.

In the case of conventional home loan applications, there are specific credit score qualifications that need to be met in order to get a mortgage. And there are still a lot of applicants that get denied because of their not-so-satisfactory scores. Some would look for other loans with flexible requirements just like FHA loans and non-QM loans.

But if you want to reap its benefits other than loan approval, there are ways to boost your credit scores. Here are some of them:

Reports can have errors and you can definitely do something to correct them.

Getting credit reports regularly keeps you on track on with your score. But mistakes can happen. According to a report from the Federal Trade Commission, 20% of consumers have to dispute and fix the errors they spot on their reports.

As a result, they see a rise in their scores. So it’s good to be very particular about these reports. If you overlook on it, there might be errors you’d miss to correct.

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It’s okay to have one or two credit card accounts.

You would probably ask how something that could potentially add up to your debt would help you improve your credit score. But contrary to that belief, having a credit card line could actually give your score a boost.

This would show that you could be trusted in carrying out debts and paying them on time. Also, sometimes having no credit card could put your score at risk to some degree. Just remember that having one is a responsibility that needs to be fulfilled at all times.

But then there’s a catch.

Yes, getting a credit card is okay. But it doesn’t mean that you just go ahead and swipe your card like it weaves magic. Remember that your ability to pay your debt is what would keep your credit score in good condition.

So don’t overuse your credit card. Make sure you only use them when you need them and make sure that you are being responsible by paying your dues.

Always pay on time.

Payment history plays a big role in your FICO score. If you have a late payment or if you have skipped a payment, that would definitely be reflected in your score.

Nothing spells out “responsible” more than showing your ability to pay your dues on time. Therefore this rule bears repeating as needed. So here it is once more: Always pay your debt on time.

Seek counsel if needed.

Credit counseling doesn’t really do much on your score but if you’re having a difficult time making ends meet, counseling would definitely help your management skill when dealing with your debt.

From there, applying what you have learned from counseling can make wonders towards improving your FICO score.

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10 Things You Need To Know About Interest-Only Loans

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Discussing Ideas

For borrowers who are not fit for a qualified mortgage, they usually look into Non-Qualified Mortgage (Non-QM) Loans. And since these are unique loans for unique situations, it pays to get to know how each one works.

Perhaps one of the most common non-QM loans in the market is the interest-only loan. True to its term, this loan lets you pay off just its interest for a set period. But there’s more to interest-only loans than that. Here are a few facts about it:

Get to know more about Interest-only loans through our lenders here.

 

1. Lenders usually let borrowers pay the interest amount first generally between five and seven years.

2. After the interest-only period ends, you can either start paying off the principal and the interest, refinance the loan, or make a balloon payment.

3. If you choose to refinance after the interest-only period, you can refinance to the same type of loan or change it into a more stable loan.

4. Because it’s “interest-only,” the loans start out at very low rates during the initial period.

5. The initial low rates and payments make room for you to make investments, grow your extra money that could help make it easier to pay the principal once the interest-only period expires.

6. Interest-only loans could also allow a borrower to qualify for a larger amount on his/her second loan.

7. Big banks offer interest-only loans. To those who are interested, established banks like the Bank of America or Chase have this type of loan available.

8. One of its drawbacks is that a borrower might not be able to afford to pay the principal when the loan term is done.

9. Another thing is that if you’re looking to build equity with the home you purchased, the standard term period for interest-only loans might not be enough to grow your home’s value.

10. If you think you won’t reside in the property longer than the loan term, selling the house before the Interest-only period would end is possible.

In the end, interest-only loans must be carried out by interested home buyers who know how to handle this kind of loan and the risks that go with it. It also helps to ask from different lenders shop for different offers so that you can compare and see what would really work for you.

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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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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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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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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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Survey: Mortgage Purchases to Increase in 2017

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Survey- Mortgage Purchases to Increase in 2017

With rising home prices, interest rates inching higher, and housing inventory still in the low, it’s only logical to predict that mortgage purchase volume this year would dwindle. But a recent survey by Lenders One Cooperative says otherwise.

Out of the 200 lenders that participated in the survey, 94 percent expect an increase in mortgage purchases, a significant march up compared to last year’s 62 percent.

Furthermore, more than half of the lenders (59 percent) expect a rise in first-time homebuyers. This is in line with a report from the National Association of Realtors released recently showing a relative increase in first-time homebuyer’s share in mortgage purchase originations from 2015 to 2016.

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Non-QMs on a comeback

Consumer debt is seen as a potential risk factor that could challenge growth. Almost majority of the lenders (93 percent) said they already dispense Non-QM loans, though most of this bulk come from jumbo loans – a loan choice that increased parallel to the rise in home prices.

Will the prediction deliver? Bryan Binder, CEO of Lenders One believes so, if the lenders shift their focus into the purchase market and use tools and solutions that could improve efficiencies in business.

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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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