Non-Qualified Loan

Regulations Result to Lower Non-QM Originations

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Regulations Result to Lower Non-QM Originations

Per an American Bankers’ Association’s Real Estate Lending Survey released recently, tight regulations have never been helpful in serving the business objectives of bankers. A good 95 percent of bankers say current regulations are basically hindering credit availability towards consumers. They highlight the toll in cost that they needed to integrate into their processes for compliance. The report was released during the association’s annual Real Estate Lending Conference in Orlando, Florida.

Report highlights

Among the highlights of the report include the fewer non-qualified mortgage originations in 2016. In total, they have originated 5 percent less in non-qualified mortgages last year. In 2015, non-qualified mortgages made up 14 percent of all mortgage originations but decreased to only 9 percent in 2016. Over 30 percent of these bankers stopped originating non-QM loans due to the stricter regulations.

ABA EVP Bob Davis says “Non-QM loans have been subject to heightened regulatory requirements and risk, reducing the willingness of banks to extend these loans to even the most creditworthy borrowers. Despite ongoing regulatory hurdles, community banks remain resilient in their ability to manage risk levels, increase productivity and introduce more first-time homebuyers into the market.”

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Record-breaking numbers

The survey yielded some surprising numbers, aside from the highlighted non-QM decline. In its 24 years of establishment, first-time homebuyers mortgage lending on single-family abodes hit the highest. Last year’s record was a 16 percent rise from the previous year’s.

Foreclosures fell as well. In 2015, foreclosures were at 0.63 percent. This year, it decreased to just 0.37 percent.

Meanwhile, delinquencies on single-family home loans increased to 1.42 percent from 1.27 percent in 2015.

It also appears that consumers still bank on stability by the number of fixed-rate mortgage originations which remains the most popular loan type, according to the survey.

Aside from the tightened regulations, other concerns among realtor circles include the rising interest rates, continued scarcity in available housing, and the increasing cost of operation.

The survey was participated by 159 banks, 76 percent of which with less than a billion dollars in assets.

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2016 Share of Non-QM Loans Return to 2014 Level

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2016 Share of Non-QM Loans Return to 2014 Level

Against the backdrop of regulatory control, lenders made fewer non-qualified mortgages or non-QM loans in 2016. This is according to the latest real estate lending survey conducted by the American Bankers Association (ABA) among 159 participating lenders, made of commercial and savings banks.

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Regulations Take a Toll on Non-QM Loans, Lenders

The respondents cited increased regulations or regulatory burden in the mortgage market as their top concern.

The percentage of non-QMs in the total mortgage production dropped to 9% in 2016 from 14% in 2015. Last year’s figure was on the same level as 2014’s 10% around the time when the ability-to-repay rule and QM guidelines were first introduced by the CFPB.

The regulatory impact on lending non-QM loans can be seen by an increasing number of banks restricting themselves to making QM loans (31% in 2016 compared to 26% in 2015). Also, banks who primarily originate QM loans then make non-QM loans for a targeted market decreased, from 54% in 2015 to 45% in 2016.

ABA Executive Vice President Bob Davis observed in the trade group’s official journal, “Non-QM loans have been subject to heightened regulatory requirements and risk, reducing the willingness of banks to extend these loans to even the most creditworthy borrowers.

Sixty-one percent of the participating banks expect the ATR/QM rules to have a moderate effect on credit availability, while 29% believed the impact to be negligible and 10% rated the impact as severe.

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“Despite ongoing regulatory hurdles, community banks remain resilient in their ability to manage risk levels, increase productivity and introduce more first-time homebuyers into the market,” Mr. Davis pointed out.

In fact, more single-family mortgages were originated for first-time homebuyers in 2016. The percentage increased from 15% in 2015 to 16% in 2016, a record for the survey concerned.

What Makes Non-QM Loans?

The loans’ debt-to-income ratio was the main reason cited by banks why non-QM loans failed to pass the QM standards in 2016.

Other reasons cited were documentation requirements that prevented consideration of all income and assets, interest rate spread exceeded the available spread over the average prime rate, balloon payment, interest-only payment, and excessive points and fees.

A vast majority of banks who chose to originate non-QM loans kept these loans in their portfolio while a few sold them to investors directly or in the secondary market.

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Bulletproofing Non-Qualified Mortgages

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The federal government has identified what characteristics a qualified mortgage should have. Measures are also in place to protect lenders from the legal repercussions of a default. Nevertheless, banks and private financial institutions are offering non-qualified mortgages because there is still a demand for them. There’s an entire demographic out there with low credit scores and a debt-to-income ratio that’s well over 43 percent. These individuals need financing and lenders are there to deliver.

Since non-qualified mortgages are primarily intended for risky borrowers, lenders are taking steps to bulletproof this type of offering. Here are some measures currently in place.

Demonstrated willingness to pay

A borrower’s financial viability is demonstrated through high credit scores. Lenders are also favoring individuals who’ve had experience in paying a mortgage before. However, that’s not to say that new homebuyers won’t be able to qualify. Further documentation may be required of those applying for a home loan for the first-time.

Full documentation is required

Paperwork showing all possible income sources, a record of assets, and a complete employment history is also a requirement for most Non-QM options. Borrowers with strong mortgage histories with a bank, private lender, or credit union may benefit from having documentation requirements streamlined.

»Learn about common loan documentation requirements here.»

Flexibility for high-income earners

Lenders are designing flexible options for their high-income clientele. Individuals with hefty commissions or expansive investment portfolios are usually given unique repayment options. One such product is the interest only loan, which permits the borrower to only pay off the interest within the set loan term and work on paying the principal later on.

Exceptional process and controls

In the past, banks have had a hard time implementing solid origination and servicing practices. This is now starting to change. Financial institutions are implementing guidelines for non-qualified mortgages based on:

  • Consistent application of underwriting standards.
  • Adherence to fair-lending requirements during the underwriting and loan pricing processes.

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Pros and Cons of Interest Only Loans

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Are you looking for a house you can live in for a couple of years? Or perhaps seeking a financing option that will make it easier for you to purchase a home today? If you answered yes to both, consider interest only loans.

What is an interest only loan?

This type of non-qualified loan allows the borrower to pay only the interest on an existing mortgage. It usually runs between 5 and 7 years, after which the borrower may choose to do one of the following:

  • Refinance their home
  • Make a lump sum payment
  • Begin paying off the principal

A borrower who chooses this option must remember that the loan balance remains unchanged because no payment is being put towards the principal during the first couple of years.

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What are the pros of getting this type of loan?

Some noteworthy advantages of an interest only loan are:

  • Low monthly payments
  • A borrower could qualify for a larger amount on his second loan
  • Relatively low monthly payments mean that someone with a hefty sum of cash can divert a portion of his liquid assets towards other investment ventures. When the loan term is up, he would be able to pay a lump sum on the property, while still having extra funds.
  • The monthly mortgage for an interest only loan is tax deductible.

How about the cons?

Interest only plans also have these drawbacks:

  • Many can’t afford paying off the principal when the loan term is up.
  • The home purchased may not appreciate as fast as expected.
  • Future income may not match borrower’s expectations.

How do I know if this is the right choice for me?

Apart from the desire to live in a property temporarily, you should only consider interest only loans if you are sure that whatever income you have will increase in the future. Otherwise, you could find yourself at risk of owing more money on the house you bought, since you’ll have to deal with both the combined amount of the principal plus interest each month.

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Benefits of Non-Qualified Mortgage to First Time Homebuyers

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Having a home of your own is a wonderful accomplishment. It is symbolic of many things – independence, security, status. Nonetheless, the greatest thing about home ownership is that it teaches financial responsibility. There’s nothing like paying a monthly mortgage to understand and appreciate the beauty in budgeting. In some cases, the present circumstances of a borrower prevent him from qualifying for the usual loan products. Fortunately, there’s such a thing as a non-qualified mortgage.

Before we launch into a discussion of this loan’s benefits, let’s first take a quick look at what gave rise to the NON-QM.

Non-Qualified Mortgage and the Demand that Prompted It

Even now, when there are many affordable places to live in the US, buying real estate is not cheap. In most cases, you’ll need to put down a sizable down payment in order to snag that three-bedroom suburban townhouse. The process is not easy either. Conventional loans require documentation to prove that you are a secure investment. This includes tax forms and employment records. Federally backed mortgages just mean more paperwork.

There are those who don’t fit the profile of a conventional borrower. These individuals are either extremely wealthy but don’t have regular jobs, or have household incomes that are well below the average. Still, these people have the right to seek a means towards homeownership.

The solution? A loan option with a DTI ratio above 43% and none of the usual documentation.

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Non-Qualified Mortgage and Its Appeal to Lenders

Lenders, armed with liability protection from the Dodd-Frank Act, are being encouraged to originate this type of loan due to demand and potential profit. They can also enjoy specific advantages like:

  • Reduced competition
  • Minimal infrastructure changes

Non-Qualified Mortgage and Its Benefits to Borrowers

Here are some of the noteworthy benefits of a non-qualified mortgage:

  • There’s no need to present an extensive amount of paperwork in order for the lender to be confident in the borrower’s ability to repay the loan.
  • Income verification can be done through bank statements, not tax forms and paystubs.
  • The term can go up to 40 years for this type of loan.
  • Fixed assets can be used to qualify for a loan, in the event that money/income falls short.

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Learning the Basics of a Non-Qualified Mortgage Loan

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Saying that US loan products are as varied as the borrowers who apply for them isn’t far-fetched at all. In fact, many loan types have been created to cater to a specific type or types of borrowers. One of which we’ll be discussing in detail below – the non-qualified mortgage loan.

January 10, 2014 marked the implementation of the Dodd-Frank Act. Essentially, it broke down residential mortgage loans into two categories – qualifying and non-qualifying.

Under this rule, the loan should meet the following parameters to be considered a “qualified” loan:

  • A borrower’s debt-to-income (DTI) ratio should not be more than 43%.
  • The loan’s fees cannot exceed the cap provided in the regulation. This could vary depending on loan size.
  • A qualified loan may not have balloon payments.
  • The maximum loan term is 30 years.

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When the loan does not meet all of the aforementioned requirements, it is then considered non-qualified. For this type of loan, a lender must then meet what’s collectively called as ability-to-repay standards. These are composed of specific components designed to establish a borrower’s ability to repay a loan continuously for the duration of its specified term.

The Recipients

Borrowers who can benefit the most from a non-qualified mortgage loan fall into one of these two extreme categories.

  • Very wealthy individuals who have highly liquid assets but with irregular income. Rich people typically use non-qualified mortgage loans as a “bridge” loan. They apply for one while awaiting the completion of some large business transaction expected to result in a large stream of cash.
  • First-time homeowners that come from low-income areas. Their present economic circumstances make them ineligible for the qualified loan option. As such, a loan that does not conform to the parameters of a standard loan.

Lender Risk Factor

While it may not conform to federal standards, non-qualified mortgages aren’t necessarily high risk. In many cases, a lender will actually require that a borrower has an extremely high credit score, a steady job, and a sizeable asset portfolio.

Stated Income

Banks or private lenders allow for stated income. This means that a borrower may simply state how much his income is on the application form, without the need to present paystubs and other similar documents. Income is verified by reviewing bank statements.

A reliable lender will be able to walk you through the particulars of a non-qualified loan and ascertain whether it’s a good fit, considering your financial circumstances.

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Are Non-Qualified Mortgages Bad for Borrowers, Lenders?

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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.

»Are you a first-time homebuyer? Interested in getting a Non-Qualified Mortgage?»

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.

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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!»

How to Find Lenders that Offer Non-QM Loans?

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How to Find Lenders that Offer Non-QM Loans?

Non-QM loans are something that came about a few years ago after the Dodd-Frank Act went into effect. Non-QM loans are essentially loans that do not meet the Qualified Mortgage Guidelines. If a loan does not meet the QM guidelines, it cannot be sold to Fannie Mae or Freddie Mac. This greatly lowered the number of lenders that offer these types of mortgage, but it did not diminish them altogether – there are still plenty of lenders that offer them because of their profitability and basic ability to help potential borrowers become homeowners.

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What is a Non-QM Loan?

Basically, a non-QM loan is almost any non-conventional loan on the market, but even some conventional loans might not meet the requirements depending on the fees the lender charges. Typically, a non-QM loan does not meet the following guidelines:

  • Fully amortized loan (no interest-only payments or negative amortization)
  • No balloon payments
  • No loan terms in excess of 30 years
  • No excessive upfront fees or discount points (no more than 3% of the loan)
  • Debt ratio lower than 43%
  • Fully documented income

As you can see, these terms leave out people that would need any type of assistance in obtaining a loan. For example, self-employed borrowers that do not have enough income on standard income documents to qualify for the loan would be left out. Luckily, there are non-QM loans that lenders offer that are either sold to private investors in the secondary market or kept on their own portfolios.

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Meeting the Ability to Repay Rule

One factor that both QM and non-QM mortgages have in common, however, is the need to meet the Ability to Repay Rules. These rules state that the lender did everything possible to determine that the borrower can, in fact, afford the loan. This is especially important with low doc or stated income loans, as the lender is not using the standard format to verify the income. The lender needs to go to great lengths to determine without a doubt that the loan does not put the borrower under any type of financial hardship. Basically, the lender needs to evaluate the following:

  • The income and/or assets that the borrower will use to pay the mortgage, ensuring that they are legitimate and likely to continue
  • Verify employment
  • Full mortgage payment including principal, interest, taxes, and insurance and how they compare to your monthly income
  • Any other debts that are incurred on a regular basis
  • Residual income
  • Credit history

When the lender evaluates every area above, whether in the standard format or with their own requirements as they relate to a stated income loan, they can properly determine if the borrower can afford the loan and avoid the disaster that the mortgage crisis caused with the large number of stated income and no doc loans that were provided.

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Finding a Non-QM Lender

Finding a non-QM lender is not as hard as it was in the early days after the financial crisis. More and more lenders are opening up to the possibility of a non-QM loan. Typically, you should start with private lenders, as they have the capability of flying under the radar with Qualified Mortgages. They often create their own programs and hold the loans in their own portfolio, which gives them much greater flexibility than any other bank would have that must follow the QM loans if they want to sell their mortgages to Fannie Mae or Freddie Mac.

The best way is to start with smaller lenders in your local area. Talk to them about your specific situation to see what they may have to offer. You might be pleasantly surprised to find out that they do not follow the conforming cookie cutter approach to mortgages. If those banks do not have what you need, start looking outside of your local area at smaller banks across the nation. Any bank that caters to self-employed borrowers or borrowers that have a blemished credit history are your best bet for this type of loan, even if you are not self-employed or have a blemished credit history.

You might have your own reasons for requiring a non-QM loan, such as a debt ratio that exceeds 43%. This is not always a bad thing, sometimes there are special circumstances that put you just outside of that debt ratio, but if you have compensating factors that make up for the risk, some lenders will let it slide through. The problem is, however, that you cannot get a QM because of the excessive debt ratio. In this case, you need a lender willing to take a riskier loan and either keep it on their books or sell it to a private investor.

What it comes down to when finding a non-QM lender is plenty of homework. You are not going to find a lender as easily as you would with a QM loan since every lender provides those types of loans. Think of it as a specialized loan that you need to find the perfect lender to provide for you. In general, a lender that plans to keep the loan on their own books will give you the most flexibility because they make up their rules; there are no investors to please. If the lender will sell the loan on the secondary market, however, they will have to abide by the investor’s rules in order to ensure that the lender purchases the loan in the end.

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