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.
»Find out what loan products you can qualify for.»
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.
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.
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.