The prefix “non” attached to Non-Qualified Mortgages makes these loan products sound harmful to consumers. But Non-Qualified Mortgages are still appropriate loans per the Consumer Financial Protection Bureau (CFPB). Depending on where you stand in the type-of-borrower spectrum, a Non-Qualified Mortgage might be that bridge that connects you to your first home purchase. And lenders underwriting Non-Qualified Mortgages stand to gain, too.
Catering to “Out of the Box” Borrowers
Notwithstanding the relevant guidelines on qualifying mortgages (QMs), the CFPB gives lenders a go-signal to underwrite loans — Non-QM and QM loans — for as long as they (i) make a reasonable and good faith determination that a borrower is able to repay using sound underwriting guidelines and (ii) fully document this underwriting process per the ability-to-repay rules.
Basically, Non-Qualified Mortgages serve consumers that have been shut out of the homebuying scene. This is especially true for these groups of borrowers belonging to the opposite ends of the income stratum:
- Those who have high but irregular income.
- First-time homebuyers in low and moderate income areas.
Think of people who are highly liquid and can afford jumbo loans that exceed the conforming loan limits. These consumers have assets and income but they have trouble documenting their income at least in the traditional sense. It’s the same hurdle faced by the self-employed, retirees, and those who work on a commission basis.
More importantly, there is the segment of consumers in underserved areas whose economic circumstances may have lead them to have low credit, lack of down payment, high DTI, etc. These families belonging to low and moderate-income earning neighborhoods may be creditworthy but access to mortgages remains a challenge even if they are necessarily high-cost products.
Not to mention all other borrowers with myriad issues outside of the QM box are prospective candidates of Non-Qualified Mortgages.
A Boon for Lenders
Understandably, not all lenders offer Non-QMs because of the risk they carry, potential lawsuits for one. But making non-qualifying loans to the underserved borrowers has merits, seeing that the Non-QM market could potentially grow to a $400-billion industry. Take note that there is a demand but only a few lenders are making Non-QM loans.
There is also a market to sell these Non-QM loans to. Fannie Mae and Freddie Mac, the biggest purchasers for mortgages, have been limited to buying qualified loans only. As one creditor suggested, lenders can still sell those non-qualifying loans to private investors in secondary markets or keep these loans in their portfolios.
Basically, the underwriting guidelines embodied by the Ability to Repay of the CFPB are but a reiteration of what lending practices ought to be: safe and sound for consumers and lenders.
It’s a win-win situation, taken from this perspective. Given your current situation, is Non-Qualified Mortgage the right loan product for you? More importantly, do you have what it takes to qualify for a Non-Qualified Mortgage? »Need answers to these questions? Talk to a lender now!»