Non-Qualified Loan

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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Getting a Non-QM Loan if You Are Newly Self-Employed

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Getting a Non-QM Loan if You Are Newly Self-Employed

A stable employment record is one of the most common qualifications for getting a mortgage. This leaves out a large chunk of the borrower market who are either self-employed or have seasonal jobs.

For individuals who have just ventured into self-employment, the common barrier is in showing evidence of steady income for the past two years. The shift in employment status will typically not look good for qualified mortgage lenders.

Good to know, however, that there are non-qualified mortgage alternatives that you can look into if your mortgage needs are urgent.

Non-Qualified Mortgage Defined

Non-Qualified Mortgages are simply home loan programs that do not meet the standards set by the Dodd-Frank Act of 2010. This rule establishes certain qualifications that serve to protect the lender and the borrower from the mess of default. These requirements include:

  • a DTI ratio not exceeding 43 percent
  • standard proof of income
  • standard amortization
  • points not exceeding 3 percent of the loan amount

Newly self-employed individuals would normally have a problem with giving a proper proof of income. That makes it hard for them to qualify for qualified mortgages. But that does not mean getting a home loan is impossible.

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A non-qualified mortgage is any of the available home loan programs today that have qualifying requirements not consistent with the aforementioned.

That means if you are newly self-employed, have a commission-based or seasonal job, or receive income from different sources, a Non-QM loan can get you covered.

From the look of it, it seems like Non-QM loans are risky business for borrowers, only taking advantage of their vulnerable situation. Fortunately, this is not the case. Non-QM loans still abide by the Ability to Repay Rules which ensure that the borrower’s income, employment, and credit history are duly verified. The lender still ensures that you have the capacity to repay the money you owe.

The Problem with History

Another common hindrance to loan approval for many newly self-employed individuals is the lack of income history as basis for the loan. If you have just started your slate, it’s likely that you still have very short history to show for your income. Lenders would like to see a positive possibility from your income sources, no matter the period. You can make this possible by:

a) opening a business within the same industry that you had been working for prior to your self-employment
b) partnering with someone who is experienced in the industry
c) being able to show the availability of financial reserves which can cover you should your business fail
d) showing non-delinquent payments from the time you started your self-employment

Non-QM loans are not backed by secondary markets that is why the programs are as diverse as they are. Lenders formulate their own qualifying criteria. You can ensure the approval of a non-QM loan if you have good income history no matter how short and a good financial backing via assets.

Speak with a lending professional today to be guided in your Non-QM application process.

3 Things to Avoid While Improving Credit Score

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3-things-to-avoid-while-improving-credit-score

These days, having a less than perfect credit score ain’t all bad. If you fall short of getting a 700 on that credit report, you’ll still find lenders who’ll be willing to accept you as a borrower. Loan programs like those administered by the FHA are also more forgiving of those with blemished credit.

Legislation like the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 have also paved the way for banks and credit unions to offer financial products outside of the prescribed loan guidelines. If you are self-employed with limited documentation, you could still be granted any of the so-called ‘non-qualified’ mortgage products like stated income or no documentation mortgage loans.

Is a non-qualified loan the answer to your financing needs?

The information above should prove useful if you really need to buy a house now. However, if you can hold off on the purchase, it would be wise to work on improving that credit score first. Disputing errors on your credit report and seeing to it that bills are paid on time are just two things you can do toward this end.

To ensure that you don’t fall off the wagon while building better credit, here are three things you should avoid.

1.Moving debt around

Owing a considerable amount of debt has an adverse effect on your credit score. As such, it could be tempting to move debt around so this can be resolved quickly. However, moving debt around could lead you to owe more, which could then be more difficult to pay.

2. Opening too many credit accounts

Avoid opening too many accounts in order to have a better credit mix. This practice can pull down your credit score. What you can do instead is focus on having one or two credit cards that you can maintain.

3. Failing to update relevant personal information when necessary

Not informing your creditors that you’ve changed addresses can lead to bills not being received on time. This could lead to late payments for bills and other forms of debt. In the same manner, failing to notify of a name change could result in inaccuracies on your credit report.

Get more insights on improving your credit score from a reputable lender.

Non-Qualified Mortgage Loan Programs

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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.

Why Subprime Loans are Necessary Today

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If you say the word “subprime loan” to a banker, you will likely see him cringe in return. Bankers do not like the term subprime any longer and are not making subprime loans as of today, so to speak. What they are offering, are loans with a different name – Non QM Loans, which stands for non-Qualified Mortgage Loans. That sounds a little better, doesn’t it? It could be just because of the tarnished name that subprime got over the years of the housing crisis, but whatever the case may be, non QM loans are making a comeback and a necessary comeback at that.

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Qualified Mortgages are Not for Everyone

A qualified mortgage is a mortgage that meets very strict guidelines. These are the mortgages that Fannie Mae, Freddie Mac, FHA, VA, and the USDA will purchase and/or guarantee. These loans fit a perfect mold and are a perfect fit for certain borrowers – but not all borrowers! Unfortunately, the housing crisis did not only hurt the banks, it hurt consumers too. Many of these consumers have not quite bounced back to the point that they would fit the mold of standard, conventional lending. This leaves them without the ability to get a home, unless they obtain a non-QM loan. Getting around the QM guidelines, these lenders are requiring other mitigating factors to make up for whatever it is that prevents the consumer from falling under the Qualified Mortgage guidelines. Typically, it is the debt ratio that is making these loans non-qualified as 43% is the maximum to qualify. The borrowers that have lower credit scores are naturally going to be charged a higher interest rate, which then pushes their DTI over that threshold – making them “subprime.”

Getting More People into Homes

The Qualified Mortgage guidelines are pushing people that had recent credit issues away from owning a home, which is why the non-QM loans are making a comeback. These are the loans for people that had bad things happen to them – maybe they suffered a bankruptcy or foreclosure or maybe they defaulted on several credit lines as a result of losing their job or being downsized. These life events may have passed for these people and they are trying to make a name for themselves again, but with the stricter mortgage guidelines in place, it is becoming impossible.

Qualified Mortgage is not for everyone, consider a Non-QM loan»

Subprime Means Something Different Today

Just because a loan is non-QM today, does not mean that it must not meet the Ability to Repay Rules – yet another rule put into place by the Dodd-Frank Act. This rule states that each borrower must be able to pay the loan by proving their income and assets; be able to verify their employment; have all payments figured into their debt ratio that apply to the house as well as other monthly obligations; and have satisfactory credit history. To sum it up, it means that banks must do their due diligence to ensure that a borrower can in fact, afford the loan despite the slightly higher interest rate that may be charged. Lenders are still unable to charge excessive fees or provide risky terms, such as negative amortization or interest only payments. Basically, the borrowers allowed the non-QM loans are those that have a credit history that does not allow them to qualify for a standard loan yet they can prove that they can afford the loan.

If you are looking for a loan and do not fall within the conforming or FHA guidelines, non-QM loans could be your best bet. As long as you have compensating factors for your lower credit score or poor credit history, such as any of the following, you may have better luck than you think at getting a loan.

  • Excessive reserves/assets
  • Low debt ratio
  • High down payment
  • Stable employment history

More and more investors are realizing the profits to be had in the non-QM lending industry and the benefit it will have on the economy. Many lenders are still keeping these loans on their own books, but as more and more investors come forward, the funds will begin to pool and more non-QM loans will begin to flood the market, making getting a loan easier yet today, but not as easy as we saw in the early 2000’s.

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