Non-Qualified Loan

Understanding the Characteristics of a Non-Qualified Mortgage

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FamilyIf a loan doesn’t meet the Qualified Mortgage Rules, it’s considered a non-qualified mortgage. Understanding the characteristics of a non-qualified mortgage can help you decide if it’s right for you. Nowhere does it state that a non-QM loan is bad. You should just understand what it is though. You should also understand what it means for your financial future before proceeding.

What is a Non-Qualified Mortgage?

Let’s start with this. A non-qualified mortgage is not necessarily a high-risk loan. Basically, it’s a loan that doesn’t meet the Qualified Mortgage Guidelines. So let’s look at what those QM guidelines are:

  • no more than 3 points charged upfront
  • doesn’t exceed a 30 year term
  • fully amortizes principal and interest
  • doesn’t have negative amortization
  • debt ratio that doesn’t exceed 43%

So as you can see a non-QM loan could simply be an interest only loan. Does this make it bad? It doesn’t. It just doesn’t meet the QM guidelines because of the risk of payment shock the borrower might experience.

Who Benefits From the Qualified Mortgage?

Both the lender and the borrower benefit from the Qualified Mortgage.

The lender benefits because they are protected against legislation should the borrower default. As long as the lender follows all QM guidelines they can’t be sued by the borrower. This includes putting forth good effort in establishing the ability to repay the loan.

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The borrower, of course, benefits by securing a loan they can afford. Generally, that’s the idea whether it’s qualified or not. But, there are some extra precautions in place that safeguard borrowers with the QM loan. This doesn’t mean, though, that non-qualified mortgages automatically put a borrower at risk.

The Characteristics of a Non-Qualified Loan

So now let’s look at what the characteristics of a non-qualified loan look like:

  • Interest only loans – Despite the housing crisis being blamed on loans like the interest only loan, they still exist. The primary borrowers with this type of loan are the wealthy investors. They often flip homes and don’t need to worry about paying down the principal. They take the interest only loan to help them have cash flow while they fix the home up. Once they sell it, they pay the loan off.
  • Stated income loans – This is another type of loan that many put the blame for the housing crisis on. Today’s stated income loans aren’t the same, though. They are more like an alternative documentation loan. Rather than “stating” income, borrowers provide different documentation. For example, rather than paystubs and W-2s, they might provide bank statements. The income is verified, just in a different way.
  • Verified asset – Borrowers that don’t have a current income but have enough assets to cover the mortgage payments may use the Verified Asset program. This is a non-qualified program since the lender doesn’t directly verify income.

The basic characteristics of a non-qualified loan are those that make it a risky loan. A few other examples include loans given to borrowers who recently had a bankruptcy or foreclosure. Lenders that allow a shorter waiting period than the standard FHA, VA, and conventional guidelines fall under the non-QM category.

The largest category of borrowers that take out a non-qualified mortgage, however, are the self-employed borrowers. These borrowers may not have the paperwork showing the income they actually make. Or they make less on paper than they truly bring in. The most common issue is the borrower that is self-employed for less than 2 years. Most FHA and conventional lenders won’t be able to accept this income. A non-QM lender would be able to, though.

You could call these loans “subprime,” but they really aren’t. They are just loans provided by private lenders that choose to carry the loans in their own portfolio.

All Loans Must Meet the Ability-to-Repay Rules

No matter what type of loan you take out, it must meet the ability-to-repay rules.  Basically, this means the lender made a good faith effort in determining that you can afford the loan.

The method the lender uses depends on the lender’s own requirements. In a perfect world, this means documenting income and assets. But when that’s not the case, the lender must use adequate effort to make sure the loan is affordable. In addition, the borrower must make sure the fully amortized payment is affordable. This is the case in interest only loans as well as adjustable rate loans. Lenders can’t use the teaser rate to determine if a borrower can afford the loan.

Maximizing the efforts to make sure borrowers can afford a loan can help minimize default. As you can see, the characteristics of a non-qualified mortgage aren’t bad characteristics. They are just alternate ways to help borrowers get a loan that they can afford.

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPB

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPBThe Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.

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Verification of Income and Assets

The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.

To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).

(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.

The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.

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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.

Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.

Downpayment not an Asset

In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.

The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.

A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.

“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.

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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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Role of Non-Qualified Mortgages in Residential Home Lending

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Role of Non-Qualified Mortgages in Residential Home Lending

In the wake of the mortgage crisis, subprime mortgages seemed to go by the wayside. They were suddenly just not available since the finger was being pointed at them for the reason for the downfall. Was that the reason? No one will truly know, but the good news is that subprime mortgages have made a comeback, just with a new name. That new name is the “non-qualified loan.” The name came about as a result of the new guidelines set forth by the government. After the housing crisis, all loans had to be a “Qualified Loan.” If it did not fall within these guidelines, it was not qualified and the borrower could not come back at the lender if they were to default.

Qualified Mortgage Guidelines

A qualified mortgage is one that the lender can prove without a doubt that you can afford. This is not a subjective decision either; the government set forth specific guidelines that each loan must meet in order to be considered qualified. These guidelines include:

  • A debt ratio cannot be higher than 43 percent – no exceptions
  • The money the lender charges for discount points or origination fees cannot total more than 3 percent of the loan
  • The loan must be a straightforward amortization
  • You must provide adequate proof of your income
  • The term cannot be longer than 30 years

What does it Mean to be a Qualified Loan?

Aside from meeting the above guidelines, qualified loan holders have a little more justification should they default on their loan. With a qualified mortgage, the borrower has the right to sue the lender if he were to be unable to afford the loan down the road. In addition, lenders are subjected to penalties if they provide loans to borrowers under the QM guidelines and they do not meet them. The qualified loan basically means that the lender evaluated every possible aspect of the loan file to determine that it is a good fit for the borrower.

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The Non-Qualified Mortgage Loans

The good news is that the borrowers that do not fall under the qualified guidelines can still obtain a mortgage. They actually have a little more leeway, which is where non-qualified loans come across as subprime loans. Not every lender is going to offer this type of loan because they are unable to sell it on the market – they have to keep the loan in their own portfolio. This might require you to do a little shopping around to find the right lender.

Borrowers that do not meet the QM guidelines will need to have compensating factors to make up for the downside of their loan file. For example, a higher than 43 percent debt ratio would need a compensating factor in order for the lender to see that it is not a completely risky loan. One way to offset a high debt ratio is with adequate reserves in your bank account. If you can show the lender that you have 6 to 12 months’ worth of reserves on hand, your loan suddenly becomes less risky.

Something that is very different for non-qualified loans versus subprime loans is the work the lender needs to do to make sure you meet the “ Ability to Repay” rules. These rules require lenders to ensure that they verify your income, assets, and employment as well as ensure that your debt ratio is accurate and that they take a close look at your credit history. What this means basically, is that you cannot have any type of “stated income” loan, although there are ways around that as well. If you cannot prove your income the standard way, you can get away with using bank statements to prove your income. This is a version of a stated income loan but with an alternate verification.

In the end, everyone gets funding, it is just a matter of how you get it. Yes, QM loans have lower interest rates and lower fees, but conventional loans always had lower rates and fees than subprime loans did too. The key factor is that you are able to get a loan that you can afford, getting you into the home you desire.

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