Non-Qualified Loan

What Types of Non-QM Loans are There?

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After the housing crisis and the start of the Dodd-Frank Act, you likely heard a lot about qualified and non-qualified mortgages. Non-qualified sounds bad, just like subprime does. But it’s not as bad as it sounds. Understanding the difference can help you determine which is right for you.

What are Qualified Mortgages?

Qualified mortgages are those that the lender went above and beyond to make sure you could afford the loan. You demonstrate the ability to repay the loan in several ways:

  • Your debt ratio does not exceed 43%.
  • You can fully document and prove your income using standard methods. This includes providing paystubs, W-2s, and tax returns if necessary.
  • Your liabilities are fully verified and documented with accurate monthly payments

In addition to your ability to repay, the loan must meet several other qualifications. The lender controls these issues, though.

  • The lender can’t charge more than 3% of the loan amount in total fees. This includes any points charged on the loan.
  • There must not be a pre-payment penalty. You should be able to pay the loan off whenever you want.
  • The loan may not be interest-only. It must be a fully amortized loan.
  • There can’t be a balloon payment at the end of the term.
  • The loan must not have a term that is excessively long.

If lenders follow each of these rules, they are protected against litigation from the borrower. The lender can’t claim that the lender falsely approved them for the loan. The lender can prove that they adequately qualified the borrower’s income, debts, and assets. They can also prove that they made sure the borrower could afford the maximum payment on the loan, in the case of an ARM.

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Another benefit of the Qualified Mortgage loan is the lender’s ability to sell it on the secondary market. Lenders don’t have to keep the loans’ on their own books. They have the option to sell them and make room for new loans.

The idea behind the Qualified Mortgage program is to minimize the number of “bad” loans written. When lenders carefully evaluate a borrower’s ability to repay, they lower the risk of default. This helps not only the lender, but the borrower and the community as well. The fewer foreclosures that are out there, the less negative impact there is on property values. In the end, everyone wins from the little bit of extra work QM loans require.

What are Non-Qualified Mortgages?

Any loan that doesn’t fall into the QM guidelines is a non-qualified mortgage. Again, this isn’t necessarily a bad thing. It doesn’t mean you have bad credit or you fabricate your income. It just has something that doesn’t meet the QM guidelines. They are what you might call “creative” loans. They don’t meet the standard guidelines, but the lender still must make sure you can afford the loan.

One rule that is a commonality between QM and non-QM loans is the Ability to Repay Rule. Every borrower must meet this rule. It means that the lender made a good faith effort to ensure that you can afford the loan, whether or not it’s a qualified loan.

In general, the following differences occur in the non-QM loan:

  • The loan usually has a higher interest rate and higher fees. This often makes it non-QM because it doesn’t fit within the 3% rule of QM loans.
  • The borrower might not be able to verify his income the traditional way. Self-employed and wealthy unemployed borrowers are a good example. They may use their bank statements to qualify for a loan rather than paystubs and tax returns.
  • The loan might have an interest-only feature or a balloon payment.

Again, the lender must make sure the borrower can afford the loan, no matter its type. The largest difference, however, is lenders must keep these loans on their books. Fannie Mae and Freddie Mac will not buy them. This means the lender creates their own portfolio with the loans on their books. It could limit the number of loans they write.

Who Are the Best Candidates for Non-QM Loans?

It might seem strange to think that anyone would willingly take a non-QM loan. With no restriction on fees or interest rates, it could be trouble. But, there are certain lenders that just don’t fit the mold. Their options are to not have a mortgage or take one from a non-QM lender. That being said, not all non-qualified mortgage lenders are bad.

The key is to shop around. You’ll find the lender that suits your needs the best this way.

Following are the most common borrowers to opt for non-qualified mortgages:

The most common borrower, as we discussed briefly above, is the self-employed borrower. Fannie Mae and the FHA often require borrowers to have a 2-year history of self-employment before qualifying for a QM loan. What if you just started your business but need a mortgage? You can opt for a non-QM loan. Many lenders have programs for self-employed borrowers. These programs allow the use of bank statements rather than 2 years of tax returns.

Another common borrower is the wealthy borrowers without a job. These borrowers don’t need to work. They live on the income from their investments. Again, this isn’t a steady job that a lender can prove. This precludes them from a qualified mortgage. A non-QM lender, however, can use the bank statements as proof of income and the ability to repay the loan.

Any borrower that suffered a negative economic event usually does best with a non-QM loan. For example, if you file for bankruptcy, you’ll have a required waiting period with FHA and Fannie Mae loans. A lender writing non-QM loans, though, may reduce that period. They may want to make sure you have fully recovered from the BK, but they may not make you wait 2 years or more like other programs.

Should You Take a Non-Qualified Mortgage?

The bigger question is whether you should take a non-qualified mortgage? Should you pay more for a loan? Keep in mind that not all non-QM loans cost more. It depends on the lender and the scope of your application. If you have a tricky situation, you’re going to pay for it, literally.

Lenders need to make up for the risk of default that your loan poses. If you had a recent BK, but the lender will give you a loan, you may pay a few points. Let’s say it’s a $200,000 loan and they charge 2 points. Is $4,000 worth it for you to get a loan now rather than waiting 2 years? That’s a personal decision, of course. But, it’s what you must consider when you decide if a non-QM loan is right for you.

It may even be possible to find a non-qualified mortgage for the same fee or rate as a QM loan. It depends on the lender and what you present to them. Don’t discount the benefit of the non-QM loan, though. If you need one and it’s the only way to get approved, shop around to find the deal that works best for you.

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CFPB Assesses Effectiveness of ATR/QM Rule, Seeks Public Input

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The Consumer Financial Protection Bureau is assessing the effectiveness and impact of the ability-to-repay/qualified mortgage rule. It is currently seeking public input to help with its assessment on the ATR/QM rule, which will be made public by January 2019.

CFPB Director Richard Cordray in his agency’s request for information said, “The Bureau anticipates that the assessment will primarily focus on the ATR/QM rule’s requirements in achieving the goal of preserving consumer access to responsible, affordable credit.”

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ATR/QM Rule: The Creation

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was enacted following the financial crisis of 2008. Enshrined in the Dodd-Frank Act are:

  • A set of new standards requiring mortgage lenders to assess a consumer’s ability to repay a mortgage.
  • A class of qualified mortgage loans that don’t contain risky features, e.g. negative amortization, balloon payments, etc., and must comply with the ATR.

To make these rules effective and clear, the CFPB is authorized by Congress to issue implementing regulations. The CFPB consequently issued the Ability-to-Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z) in January 2013, as further amended and became effective in January 2014.

ATR/QM Rule: The Assessment

To fulfill its mandate, the CFPB is conducting an assessment of the effectiveness of the ATR/QM rule. The assessment involves a review of the rule’s major provisions, as outlined:

  • The ATR requirements, including the eight underwriting factors a creditor must consider;
  • The QM provisions, with a focus on the DTI threshold, the points and fees threshold, the small creditor threshold and the Appendix Q requirements, and
  • The applicable verification and third-party documentation requirements.

It will look at how these major provisions influence consumer outcomes, i.e. mortgage cost, origination volumes, approval rates, and subsequent loan performance.

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Of special interest to the CFPB is the effect of the rule on certain groups borrowers who:

  1. Are generating income from self-employment
  2. Are anticipated to rely on income from assets to repay the loan
  3. Rely on income from assets to repay the loan
  4. Rely on intermittent, supplemental, part-time, seasonal, bonus, or overtime income
  5. Are seeking smaller-than-average loan amounts
  6. Have a DTI ratio exceeding 43%
  7. Are in the low and moderate income bracket
  8. Are minority borrowers
  9. Are rural borrowers

The agency will also examine the impact of the Temporary GSE QM category, a set of QM loans eligible for purchase or guarantee by Fannie Mae or Freddie Mac with the earlier termination or expiration of the category included in the review. This set of QM loans will expire on January 10, 2021, or when the conservatorship of the GSEs ends.

Interested parties can submit comments electronically, via email, mail or hand delivery.

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Financial CHOICE Act Incorporates Safe Harbor Provisions for Creditors

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Financial CHOICE Act Incorporates Safe Harbor Provisions for Creditors

The Financial CHOICE Act of 2017, which seeks to replace and/or repeal certain aspects of the Dodd-Frank Act, incorporates safe harbor provisions from the Portfolio Lending and Mortgage Access Act.

These provisions seek for an expanded definition of a qualified mortgage to include certain mortgages held on portfolio and provide safe harbor to certain creditors from lawsuits arising under the QM rule, according to Rep. Andy Barr who authored the Portfolio Lending and Mortgage Access Act as reintroduced in April 2017.

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What’s Proposed

Both bills contemplate amending Section 129C of the Truth in Lending Act (TILA) to add safe harbor protections for (i) creditors who are depository institutions under Section 19(b)(1) of the Federal Reserve Act and (ii) mortgage originators.

1. Depository Institutions

Specifically, a depository institution will not be sued for failing to comply with the minimum standards set forth by TILA, including special appraisal requirements for higher-priced mortgage loans, as it relates to a residential mortgage loan.

Banking regulators, which refer to the Consumer Law Enforcement Agency (the Consumer Financial Protection Bureau as will be renamed if the Financial CHOICE Act is enacted) and the National Credit Union Administration, are compelled to treat the loan as a qualified mortgage if the depository institution has held the loan on its balance sheet since the origination date, and that prepayment penalties on the loan adhere to the limitations set by the TILA.

If a depository institution transfers a loan that it originated to another depository institution due to the former’s bankruptcy or failure or purchase, the depository institution that transferred the loan is deemed to have complied with the above provision.

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2. Mortgage Originators

Likewise, mortgage originators will be safe from lawsuits under TILA for leading consumers to residential mortgage loans if they are able to prove the following:

The creditor of the loan is a depository institution and has told the mortgage originator its intent to keep the loan on its balance sheet throughout the life of the loan. And that the mortgage originator will inform the borrower of the creditor’s intention to keep his/her loan on its portfolio.

A mortgage originator is defined under TILA as a person who assists a consumer in obtaining a residential mortgage loan, who offers or negotiates terms of that loan, or takes an application for such a loan, among other things.

Balloon Loan

Both bills clarify that the amendments will not be construed to prevent a balloon loan from qualifying for the safe harbor set forth in TILA Section 129C(j) if such a loan meets all the requirements of subsection (j).

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Is there an Assumable Non-Qualified Loan?

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Is there an Assumable Non-Qualified Loan?

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

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

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

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

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The Due-on-Sale Clause

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

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

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

Consider All Angles

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

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MBA Proposes Changes to Existing ATR / QM Rules

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MBA Proposes Changes to Existing ATR QM Rules

The Mortgage Bankers Association has proposed changes to the existing Ability-to-Repay and Qualified Mortgage (QM) rules.

By these tweaks formally submitted to Senators Brown and Crapo of the Senate Committee on Banking, Housing and Urban Affairs, the MBA hopes for an expanded QM credit box where more lenders can make QM loans and serve more borrowers.

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ATR / Qualified Mortgages: Now and Future

The ATR essentially requires lenders to make a determination that a borrower can reasonably afford to repay his/her mortgage. Lenders can comply with this requirement by making Qualified Mortgages.

Under QM rules, there is a presumption of compliance that loans originated as QMs per their requirements. This is called a safe harbor and protects lenders from being sued by borrowers who claimed that the lenders did not have any reason to believe they could afford the loan.

Notwithstanding the safe harbor provision, lenders face hefty fines and penalties if they fail to meet the ATR rule.

In the face of a potential costly litigation, the MBA found that lenders have been making compliance safe harbor QM loans only. This prevents borrowers who could have qualified for a QM loan from accessing “safe, sustainable and affordable mortgage credit.”

Consequently, the MBA proposes these changes that would improve on or update existing ATR/QM rules, as follows.

  1. An expanded safe harbor. That the safe harbor provision will be applied to all mortgages that meet the QM standards. Specifically, the MBA proposes to increase the QM safe harbor threshold from 150 bps to 200 bps over Average Prime Offer Rate (APOR), a benchmark rate.
  2. An updated “small loan” definition. That the ATR rule be amended to update the basis of a small loan to $200,000 from $101,953, where points and fees may exceed 3%. This allows for more borrowers with smaller loans to qualify as QM loans.
  3. A broadened right to correct technical errors. That the MBA seeks an amendment that would allow for correction of errors in case the three-percent limit on fees and points is exceeded, debt-to-income ratios have been miscalculated, and other technical errors have been made.
  4. A revised definition of points and fees. That the MBA calls for fees paid to service providers that are affiliated with lenders to be excluded from the computation of loan fees and points. This creates more competition among third-party providers.
  5. A replacement of the QM patch. QMs are required to have a DTI ratio limit of 43% or as required by FHA, Fannie Mae or Freddie Mac. The MBA urges the CFPB alongside stakeholders to develop a set of rules including compensating factors that will address loans with higher DTI ratios. This will replace the QM patch and the 43-percent DTI cap.

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Is There an Ideal DTI Ratio for QMs, Non-QMs?

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Is There an Ideal DTI Ratio for QMs, Non-QMs?

January marks the third year the CFPB has implemented certain rules for safer mortgages with improved protections. One characteristic that sets qualified mortgages and non-qualified mortgages apart is the debt-to-income ratio. For QMs, the DTI ratio should be 43% or less. If your DTI exceeds 43%, does that make your loan automatically nonqualified? Do non-qualified mortgages require DTI ratios, if at all?

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DTI Ratios and QMs

The CFPB’s ability-to-repay (ATR) rule requires the lender to verify a borrower’s income and debt load. These elements are embodied by the DTI, which measures your income relative to your debt. The resulting ratio, if it’s higher or lower, signifies that you are capable of repaying the loan or living precariously.

Calculating the DTI is essentially adding up all your debts for the month, mortgage, car loan and others. Once you get the sum, you divide it with your gross monthly income. For instance, you make $6,000 in a month and $2,000 of that goes to your debt. Then your debt to income ratio is 33%. Actual results may vary among lenders who have their own calculations.

In the example above, the DTI ratio is less than 43% and thus eligible for a qualified mortgage. But even if the ratio exceeds 43%, one can still obtain a QM. The CFPB allows for these exceptions:

  1. Small creditors must evaluate the DTI but are permitted to underwrite QMs for those with a higher-than-43% DTI. For QM purposes, these are lenders whose loan portfolio is less than $2 billion the previous year and originated less than 500 closed-end residential mortgages subjected to the ATR requirements.
  2. Larger lenders can originate loans with the higher than required DTI ratios but they must have made a reasonable, good-faith determination per the CFPB rules that the borrower can repay the loan.

Moreover, the DTI cap or 43% does not apply to government-backed loans like FHA and VA, or those eligible to be sold to Fannie Mae and Freddie Mac. These loans belong to GSE-eligible category of QMs.

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DTI Requirements for Non-QMs

Nonqualified loans are a go-to option when your DTI ratios are too high for a QM even with the exceptions. A high DTI ratio sends mixed signals to the lenders because your other debts could deter you from repaying your loan with them.

Accordingly, non-QM lenders allow for DTI ratios higher than 43% provided that your credit score/history is decent, your assets are adequate and verifiable, and your income is verifiable through documents other than the usual paperwork.

It’s thus not surprising why self-employed professionals and high net worth individuals are drawn to nonqualified loans. They are flexible enough to include borrowers whose debt-to-income ratios and income tend to shut them out of traditional mortgages.

Even with their less stringent guidelines, lenders of nonqualified loans are still required to do an ability-to-repay assessment.

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What are the Types of Non-QM Mortgages Available Today?

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Mortgages today are classified into two categories: qualified, and non-qualified. Qualified mortgages are designed to cater to individuals who can fully demonstrate their ability to pay back a loan. But a significant part of the American population does not fall within this category. Most businessmen or self-employed individuals, as well as freelancers or those who do not receive a steady stream of income may find it hard to qualify. This is where non-qualified mortgages come in handy.

Non-qualified mortgages (Non-QM) come in different forms, and target a different segment of the housing market. Let’s look into its variety.

Interest Only Non-Qualified Mortgage Products

With interest-only loans, you pay only the interest on the loan for a specified period. After this period expires, you are then liable to pay for the interest AND the principal, which could cause your monthly payments to balloon. If you are going to take this type of loan, be sure that you are well-prepared and have money to tap into by the time the interest-only period comes to an end.

Investment Property Loans

Investment properties are treated by the housing industry as business. Hence, loans for these properties do not have to abide by the rules set by the Dodd-Frank Act. This secures the variety of the type of financing an investor or borrower can get. Different lenders may have different sets of qualification guidelines for potential borrowers.

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Loans for High Net Worth Borrowers

Banks offer big loans for individuals whose net worth are significantly high. These individuals usually do not have a consistent income but do have a significant number of assets on their name. Thus, many banks offer loans that are based on assets rather than income. These assets must be verified (in lieu of the income) in order to qualify for the loan. These asset-based loans typically loan thousands of dollars or even millions to qualified individuals. However, borrowers must be able to maintain excellent credit and put a good percentage of the loan amount as down payment.

Non-Agency Mortgage Programs

Conventional, qualified mortgage lenders will deny your loan application if your debt-to-income ratio goes beyond the 43 percent limit. This poses a problem if you are receiving irregular income or are purchasing a property with a high loan amount. Thus comes non-agency mortgage programs to your aid. Through a non-agency mortgage, you can get around the 43 percent DTI cap and secure financing for your home. However, you must be able to demonstrate to the lender that you will be able to pay back the loan. Do not take a mortgage that is more than you can afford. Make an honest evaluation of your income and prepare to deliver.

Stated Income Loans

If you are having difficulty documenting your income, but need a home loan, you can opt for stated income loans. These types of loans target self-employed individuals. For stated-income mortgages, lenders do not look at your pay stubs and W2 forms as well as your income tax records. You just need to state your income and they take your word for it. Because of this, stated income loans are deemed risky and most of them has been eliminated especially after the housing crisis hit in 2008. However, there are still versions of stated income loans that exist. One of these are asset-verified loans. Compared to some of its predecessors, they have stricter guidelines and qualification requirements.

To get asset verified loans, your asset must be reflective of your income. Moreover, you must have money on your account that is enough to cover the loan expenses should something disrupt your income flow. Qualifications depend from one lender to another. But one thing is made sure: that you can afford to pay for the loan despite vague income records, and that you will be able to pay back what you owe.

If you are looking for financing but do not fit the traditional eligibility and qualification standards required by lenders, non-qualified mortgages could be your saving grace. However, these loans are risky and there are frauds who are always ready to pounce on the unsuspecting. When you head out shopping, make a criteria for your lender, and always be on the lookout for non-credible transactions.

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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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