Non-Qualified Loan

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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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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How Does My Debt Affect My Loan Approval?

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How Does My Debt Affect My Loan Approval?

The type of debts you carry can mean the difference between getting an approval on your loan or not. Even if you only hold one debt but its terms hold significant weight on your overall finances, you may end up getting denied on your application.

Before you step into the loan acquisition process, it’s important to know how a type of debt can impact your potential approval.

First, know that there are two types of debt:

(a) secured debt – these are loans that are backed by a collateral. Collaterals are properties that serve as a guarantee of security should you default on your loan payments. The most common collaterals are vehicles and real estate properties which have significant market value. If you fail to meet your payments, the lenders have the right to take these guarantees in exchange for the money you were not able to return.

(b) unsecured debt – these are loans that are not backed by a collateral. Unsecured loans are usually lent to borrowers who are determined to be good risks. That is, they were able to show that they are financially stable and therefore capable of taking the burden of the loan and repaying it to its full term.
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A question of risk

The thing is, lenders are not really picky as to what debt a borrower carries. A secured loan is not favored over the other, but they do care about how you spread your risk.

For example, in the case of credit cards which are unsecured loans, it will give the lender an impression of a continuous stream of credit responsibility. One or two may seem fine but too many credit card debts may pose the question of payment capacity. (Hence why your DTI ratio matters as well!) Can you pay these balances in full? Can you carry the burden of revolving credit and accruing interest?

A secured loan such as an auto debt – which is a significant debt – may still be favorable, but as long as you show as a consistent history of paying them on time, you shouldn’t have a problem.

How about a mortgage?

A debt as large as a home loan may play a large part on your DTI ratio which means if you get approved with the current loan and it will exceed the ideal DTI ratio limit, you may have a hard time paying it back.

How you pay your mortgage also reflects on your score so your lender shouldn’t have a hard time recognizing your repayment capacity. If you are able to show good history, backed by stable income sources, qualifying for an additional loan may not be much of a difficulty.

However, if you are taking another mortgage, expect lenders to probe you more about your current home loan. Are you refinancing? Getting a reverse mortgage? Selling your current home and using the proceeds to get the new loan?

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A bottomline

And of course, the type of loan that you are courting, per se, is also a major determining factor in getting an approval. Prime lenders usually have stricter requirements and are therefore less inclined to give out loans to those who carry a suspicious number of debts, especially those in the subprime levels.

Meanwhile, there are a growing number of lenders who are all too willing to give you the money despite your risk, regardless of the debts you carry.

When applying, be honest to yourself and recognize your own risk as a borrower. Finding the right lender matters as much as getting the needed money.

Where can I Apply for a Subprime Home Loan?

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Where can I Apply for a Subprime Home Loan?

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

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Where to Look for Subprime Lenders?

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

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

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Everyone Must Meet the Ability to Repay Rules

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

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

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