Credit issues, low income, high debt, and little to no assets make it difficult to get a conforming loan or even a loan from the FHA or VA today. Because of the new qualified mortgage guidelines, lenders have to be very careful in who they lend money to or they run the risk of being sued by borrowers that default down the road. This is not to say that every borrower that does not meet the stringent qualified mortgage guidelines is a high risk however. The guidelines set forth by the Dodd-Frank Act make it difficult for anyone with unique circumstances to get a loan. The gist of the QM Guidelines is as follows:
- No debt ratios over 43%
- No fees in excess of 3% of the loan amount
- No risky loan terms (balloon, interest only or negative amortization)
- No excessively long loan terms (more than 30 years)
These guidelines put some borrowers at a disadvantage. Even if they have the ability to afford a loan, they are considered non-qualified if they have a high debt ratio, for example. For some people that high debt ratio is not a big deal because of the amount of assets they hold or they amount of their income is excessively high. For others, credit issues may have made them look risky, which makes lenders want to charge them a higher interest rate or higher fees, putting them over the 3% threshold. The credit issues may be a thing of the past, but because they are there, they play a role in the level of risk a borrower possesses, requiring the lender to charge more fees or a higher interest rate to make up for the risk.
Types of Non-Qualified Mortgage Products
There are lenders all over the country offering a variety of non-qualified mortgage products. What one lender offers, the next one may not. It depends on the portfolio of each lender as well as their amount of capital. If they have enough to gauge against the risk of a non-qualified mortgage, they may offer products that allow a 50% debt ratio or a low credit score in exchange for higher fees. The types of products offered differ greatly, but some of the constants that any lender requires include:
- Owner occupancy
- 0 x 30 late payments in the last 12 months on housing history
- 1 x 30 late payments in the last 12 months in non-housing history
- Letter of explanation for any credit issues (one-time issues such as bankruptcies or foreclosures)
- Low LTVs, typically less than 80%, but sometimes even lower
- Adequate assets to serve as reserves for 6 to 12 months
These are just a sampling of what lenders require in order to think about providing a non-qualified loan to a borrower. Lenders understand that the economy took a turn for the worse and millions of people have had to rethink their financial strategy including the need to become self-employed for many borrowers. Giving up a home or claiming bankruptcy is no longer looked upon as a negative circumstance as long as borrowers use it as a learning curve. If they can prove that they learned a lesson and have become more financially responsible, there are typically non-qualified mortgage products available for them.
The Common Denominator
The one thing that all lenders will have in common no matter what their guidelines are is the need to fully evaluate every loan file. They cannot provide loans like the NINJA that was around in previous years, requiring little to no verification of any income, assets, or jobs. Everything must be fully verified today in order for a loan to go through. What may differ for a non-qualified mortgage is the type of income used to qualify. For example – if you are self-employed and have only been self-employed for one year, a qualified lender will not approve you, but a non-qualified lender may have a program for your situation.
The need to verify every detail of the loan file is in place because of the Ability to Repay Rule, which is a requirement for every loan. What is negotiable is the need for it to be a qualified or non-qualified mortgage. Lenders willing to take the risk and offer non-qualified mortgage products are not guaranteed against the risk of borrowers suing them if they become unable to afford the loan. Many lenders are able to offset that risk with qualified mortgages in their portfolio, putting a little risk in each basket, allowing for diversification and plenty of profits in the end.
Specific Product Types
Every lender has their own niche for non-qualified borrowers. For example, some banks offer programs for the self-employed; retired; and real estate investors. Other lenders offer programs for those with a bankruptcy or foreclosure in their recent past or those with a higher than average debt ratio. The lenders recognize the worthiness of these borrowers and are not letting one hiccup get in the way of these potential borrowers becoming homeowners.
Careful Underwriting Procedures
Applying for non-qualified mortgage products does not mean you will not undergo a rigorous underwriting process. You will still go through the same verifications you would go through for any other type of loan. The lender needs to prove beyond a reasonable doubt that you can afford the loan comfortably whether by verifying your income, assets, or both. They need to prove that your credit blemishes are in the past and that you have caught up and are ready to take on a new liability. Without careful underwriting procedures, lenders are putting themselves at risk for lawsuits, which is something they obviously want to avoid.
Non-qualified mortgage products are available; you just have to find them. Remember that every lender has a different niche so make sure to shop around with lenders that cater to your demographic, whether you are self-employed; retired; have a low credit score; have a history of BKs or foreclosures; or have a high debt ratio. Unless you cannot prove that you have bounced back from your financial hiccups, there is likely a loan out there for you that will not cause you to pay ridiculously high interest rates and fees, making the loan unaffordable after all.