Non-Qualified Loan

10 Things You Need To Know About Interest-Only Loans

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For borrowers who are not fit for a qualified mortgage, they usually look into Non-Qualified Mortgage (Non-QM) Loans. And since these are unique loans for unique situations, it pays to get to know how each one works.

Perhaps one of the most common non-QM loans in the market is the interest-only loan. True to its term, this loan lets you pay off just its interest for a set period. But there’s more to interest-only loans than that. Here are a few facts about it:

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1. Lenders usually let borrowers pay the interest amount first generally between five and seven years.

2. After the interest-only period ends, you can either start paying off the principal and the interest, refinance the loan, or make a balloon payment.

3. If you choose to refinance after the interest-only period, you can refinance to the same type of loan or change it into a more stable loan.

4. Because it’s “interest-only,” the loans start out at very low rates during the initial period.

5. The initial low rates and payments make room for you to make investments, grow your extra money that could help make it easier to pay the principal once the interest-only period expires.

6. Interest-only loans could also allow a borrower to qualify for a larger amount on his/her second loan.

7. Big banks offer interest-only loans. To those who are interested, established banks like the Bank of America or Chase have this type of loan available.

8. One of its drawbacks is that a borrower might not be able to afford to pay the principal when the loan term is done.

9. Another thing is that if you’re looking to build equity with the home you purchased, the standard term period for interest-only loans might not be enough to grow your home’s value.

10. If you think you won’t reside in the property longer than the loan term, selling the house before the Interest-only period would end is possible.

In the end, interest-only loans must be carried out by interested home buyers who know how to handle this kind of loan and the risks that go with it. It also helps to ask from different lenders shop for different offers so that you can compare and see what would really work for you.

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A Closer Look Into Non-Qualified Loan Qualifications

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Perhaps Non-Qualified Mortgage (non-QM) Loans sound a bit new for some but for unique situations, a non-QM loan is a perfect fit. Since it gives an opportunity for borrowers that did not qualify for the conventional guidelines of a Qualified Mortgage, there is a sense of risk that comes with it. But it’s not something to worry about.

On what circumstances does a Non-Qualified loan apply?

Going into specifics, non-QM loans typically answer to individuals that are self-employed for under two years and are not showing a good amount of income on tax returns. Those who have high debt ratio but have a lot of reserves that can make it up can also qualify.

It bears repeating that non-qualified loans don’t necessarily mean that great of a risk thanks to the Ability to Repay (ATR) Rule by the Dodd-Frank Act. Even for non-QM borrowers, lenders will have to ensure that they can take on the responsibilities of paying off the loan.

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How would lenders determine if I qualify?

Lenders would still verify your credentials to see that you can afford to pay the loan in compliance with the ATR rule. Among the factors that lenders would look into are:

Income and assets
Bank statements could prove your funds and make sure you are good for non-QM loans.

Employment
For employed individuals, proof or documentation of your employment status is looked into by lenders to also prove your credentials. Usually, lenders would be able to verify this through W2 forms or pay stubs. For self-employed, income tax returns and a certification from the CPA are required.

Credit Score
This is a very crucial factor for borrowers. To make sure you build a good credit reputation, try not to open a lot of credit accounts, consolidate your debt around and also make sure to keep creditors updated with your personal info whenever you need to.

Debt to income ratio
Non-QM lenders typically allow those who have DTI ratios that are higher than 43% as long as you have a credit score or history that is satisfactory and you meet other non-QM mortgage qualifications.

In the end, it pays to seek advice for non-QM lenders. Shop for different loans and choose what is best fit for your situation.

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Are Non-Qualified Loans Really Safe?

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Are Non-Qualified Loans Really Safe?

When your credit is in bad shape, let’s face it, lenders will turn you down. And just when you think your credit score is the last nail in the coffin, one loan could be the answer. Non-Qualified mortgage loans give some people a chance to have a loan.

Non-Qualified Mortgage Loans, or Non-QM as others call it, are loans that do not fit the Qualified Mortgage Definition.

The aftermath of the recent housing crisis pressed lawmakers to draft new regulatory reforms. It gave birth to the Consumer Protection Act and the Dodd-Frank Reform.

There are minimum standards that mortgage lenders need to meet in order to be classified as a Qualified Mortgage. These new laws governing QMs also protect the lenders in the event that a borrower fails to repay his/her debts and files a lawsuit against the lender.

Now, because the rules are complex and stringent, some lenders noticed that it would be impossible for some people to be eligible for QM loans. Non-QMs came about when lenders started to come up with loan programs to cater to these people.

And since they are not QM loans, they lack the liability protection that QM loans have.

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Are Non-QMs Safe?

Just because they are not Qualified Mortgage loans, it does not mean that Non-QMs are high risk.

Some lenders of this type of loan will still look at your documents and scores. But instead of denying the borrower’s application because of some problems they see in these papers, they will adjust the interest rate or down payment to cover up for these deficiencies.

One example of a Non-QM loan is the “Interest-Only” Loans. Who offers them? Big banks, such as the Bank of America and Chase, make Interest-Only loans available to those who are looking for one.

As its name suggest, the borrower is required to pay the interest from the principal amount within a given term. After this term, the principal will then be paid off. This can be done through a lump sum payment, or the mortgage can be refinanced.

Because of this, applicants may have to go through a rigorous underwriting process. Borrowers may be required a higher FICO score and a very Low LTV to qualify.

Are Non-QMs for Everyone?

Borrowers who have sporadic income but having large assets are the target market for this loan type. For example, there are many Americans who have a steady flow of money but lack the ability to provide a W-2. This does not mean they do not have the ability to repay the loan which is required for a QM. A Non-QM can be perfect for them.

Non-Qualified Mortgage lenders give loan opportunities to individuals who won’t be eligible for a QM loan but can very well afford it. Without this loan type, there will be a huge inadequacy of financing options. Many Americans won’t be able to stay in their homes or buy properties.

Talking to a lender will help you understand Non-QMs better. A lender will also advise you whether it is perfect for you or not. Do not hesitate to learn more about it.

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Is it Possible to Get a Mortgage Without a Job?

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Is it Possible to Get a Mortgage Without a Job?

Yes, you can get a home loan without a job. It may seem impossible, and to the wary, kind of scary. But there, indeed, are legit lenders who can give you financing at the time of need.

It’s true, many lenders have slackened on qualifications years after the trauma of the 2008 crisis. Some of them have recognized the fact that a good number of “limited” borrowers deserve access to financing as well.

For unemployed borrowers, there are ways to reach a compromise with your lender – usually in the form of non-conventional assurances.

Showcase good history

Typically, lenders look at your income when you apply for a mortgage. They look at how much you earn each month and calculate how much of your debt puts a strain to that source of income.

But what if you don’t have that proverbial source, to begin with?

In such a case, your lenders may look at patterns in your credit record. These include how you pay your credit, whether you are receiving alternative sources of income such as an alimony or disability allowance, if you have cash reserves in your savings account, or if you pay your bills on time.

These elements are good indicators of a person’s creditability, despite the absence of a traditional source of fund and depending on what the lender determines, can still gain you an approval when you least expect it.

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Think out of convention

Government-backed loans are strict about their guidelines and most likely only lend money to people who can tick the conventional income availability requirement off the list. Instead, look for lender alternatives when loan shopping. These are lenders who offer non qualified loans that defy some of the guidelines set by the Dodd-Frank Act. They are more flexible at giving out approvals to those who fit their non-conventional criteria.

Enlist Co-Signor Help

If you don’t want to get in a subprime mess because you’ve been persuaded by tons of articles online about its potential disaster, you can always enlist the help of a co-signor who has the income and the credit to fill up the void of your credentials. This should be someone who can vouch for your creditworthiness and who trusts you as a financially-capable person.

Remember that when you fail to make your payments, they are held accountable as well. Plan this properly and make sure the person fully understands his or her responsibility in the situation.

Getting a mortgage without an income source can be a bit risky, both to you as a borrower and your lender. Before you finalize your decision, see to it that you have properly evaluated your finances and are confident of your ability to repay. After all, it’s your burden in the end. Be wise and know that there are options to turn to should you decide to push through.

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Debt Ratio Requirements for Non-QM Mortgages

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One of the largest hurdles in getting any loan is your debt ratio. This is the percentage of your income that goes towards your monthly obligations. Certain loan programs have maximum debt ratios already in place, allowing lenders little leeway in the programs they can offer their borrowers while other programs, especially non-QM loans, do not have any set debt ratio. In order to qualify for a QM loan, your debt ratio cannot exceed 43%. This does not mean you will never get a loan if your ratio is higher than that; it just means you will have to look at non-qualified loans with smaller or private lenders.

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Calculating your Debt Ratio

One problem with determining your debt ratio is that you might get a different percentage than your lender obtains. This depends on how the lender qualifies your income. If you are a standard salaried employee, it is fairly easy to figure out your monthly income as you make the same amount every month. Remember, your gross monthly income is how the debt ratio is calculated. Your monthly obligations divided by the gross monthly income gives you your ratio. What if you do not receive a straight salary? Then there are a few calculations that the lender will need to perform before coming up with your debt ratio – this is where the numbers often differ between borrower and lender. If you are self-employed, your expenses will take away from your gross monthly income and if you claim less income on your tax returns than you actually make, you will only be eligible to use the income that is reporting on your tax returns, making your debt ratio even higher.

Dealing with a High Debt Ratio

Sometimes borrowers have a good reason for a high debt ratio. Sometimes it is a one-time occurrence, such as something bad happened – a car accident; car breakdown; or medical emergency that has caused you to charge excessively. If this is the case, you can explain the high ratio, show how you plan to pay it down and offer compensating factors, such as six to twelve months in reserves or an excessively high credit score. Lenders want to see that despite your high debt ratio that you are able to handle your financial responsibilities without a hiccup. If you have a credit history blemished with late payments and you are trying to get a high DTI pushed through on a loan, your chances are much lower than if you had compensating factors, such as great credit. If you do have many late payments on your credit report, it is best to wait until they are at least 12 months behind you before applying for a mortgage.

Why is a High Debt Ratio Bad?

Many borrowers wonder why lenders have to cap their debt ratio at 43%. Or why they are suddenly “non-qualified” if their ratio is higher than the set amount. This 43% was set by the government agencies overseeing the mortgage industry and its eventual comeback after the mortgage crisis the industry just went through. Studies show that any debts exceeding 43% of a person’s income make it much harder to stay on top of payments, especially if an unforeseen circumstance were to occur. The fewer debts you have, the more likely it is you will stay on top of your mortgage payments. Because of this guarantee of sorts, lenders that max their debt ratio at 43% along with a few other stipulations, such as keeping the fees at less than 3% of the loan amount; not allowing any odd terms, such as negative amortization or interest-only payments; and keeping the loan term at 30 years or less are able to have protection against litigation from borrowers that do lose their home due to defaulting on their payments. This guarantee is a very large asset for lenders, enabling them to continue lending to other “good” borrowers while leaving those that do not meet those requirements in the dust.

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Non-Qualified Loans Allow for DTI Flexibility

The good news is that with the addition of the Ability to Repay Rule, many lenders are able to offer non-QM loans and still minimize their risk of getting sued by defaulting borrowers. The ATR is like a double check on the borrower, ensuring that he can, in fact, make his payments without feeling financial pressure. It is a guarantee to the government that the lender went through enough steps to verify the borrower has the assets, income, and employment he says he has in order to get the loan. There is no more taking a borrower’s word for it, as occurred in the old “Stated Income or Stated Income and Asset Loans.” Today, everything is verified no matter what and if it cannot be verified, it cannot be used for qualification purposes.

In short, if you have a debt ratio exceeding 43%, you can still get a loan as long as your other financial affairs are in place. This means that your credit score is decent – typically above 620; you have reserves on hand; and the lender can easily verify your income and assets. You will fall under the non-QM loans guidelines, but this does not mean subprime, like it used to be. It means that your loan will likely come from a smaller lender that either keeps the loan on his books and/or sells it to private investors. Your loan will not likely come from a big-name lender, but that is okay because you will get the mortgage you need with the same scrutiny that any other borrower would go through for a conforming or qualified loan.

Non-QM loans are not a punishment; in fact, they are a great way to ensure that more people become homeowners that want to become homeowners. The new mortgage guidelines that came out right after the mortgage crisis made it almost impossible for anyone to get a loan unless everything was in perfect shape, including their credit, income, assets, employment, and debt-ratio. If you need a non-QM loan, make sure you shop around to find the one that is right for your situation.

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