Non-Qualified Loan

3 Things to Avoid While Improving Credit Score

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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.

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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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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What’s a Better Choice, a Non-QM Loan or FHA Loan?

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If you are a low credit borrower, getting a mortgage is going to pose slightly more difficult for you than the person next to you with stellar credit. Your credit report shows the world your level of financial responsibility. If your credit score is low, lenders automatically think you are not responsible with your money and are a high risk when it comes to mortgage lending. This may or may not be the case for you, depending on what happened in the recent past with the economy taking a turn for the worse and the housing industry falling apart. Now that everyone is picking up the pieces, many borrowers are trying to find a way to get back into a home; the two options they typically have are an FHA loan or a subprime loan, if they have a low credit score.

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FHA Home Loan Programs

FHA loans have a general requirement of a minimum credit score of 580, but you will not find many lenders that will accept a credit score that low – but they are out there. More and more lenders are turning to borrowers that have a lower credit score, yet other compensating factors that make them less risky than their credit score makes them look. If a bank decides not to implement an investor overlay in regards to the credit score, you may find that an FHA loan is available to you. These compensating factors include steady income, a low debt-to-income ratio, and assets/reserves in your possession. Aside from the steady income, these items are not necessarily required by FHA to qualify for a loan, but many banks will require them in order to offset the risk of the lower credit score.

FHA loans offer a different type of loan than a subprime loan would offer though. FHA requiresmortgage insurance in the event that you do default on the loan. This fact makes it easier for lenders to decide to give you the FHA loan with a more lucrative interest rate and typically better terms than you would find with a subprime loan. The mortgage insurance is a major player in the game, however, as it can add several hundred dollars to your monthlypayment, depending on the amount of your loan. In addition, FHA loans require upfront mortgage insurance, which is 1.75% of your loan amount. This can be a costly closing cost, but it helps you get into a loan with a low interest rate and the guarantee that the FHA provides. It also protects you by providing you with a “Qualified Mortgage” rather than a riskier loan that a bank is going to either keep on their own portfolio or that a secondary investor has guaranteed to purchase that has higher rates and less desirable terms. Something to keep in mind with mortgage insurance on FHA loans, is the fact that you will have it for the life of the loan unless you are in the minority that puts at least 10% down on the house, in which case you would only be liable for the mortgage insurance payments for 11 years. The amount of the mortgage insurance will vary for each loan as it is 0.85% of the loan amount; that total is then divided up amongst your 12 monthly payments, which is how your mortgage payment gets higher than the principal and interest.

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Non-Qualified Mortgage Loans

Subprime loans are a completely different loan than FHA loans. The only thing they have in common is they accept lower credit scores. These loans are not part of the Qualified Mortgage program and likely have terms that are considered undesirable in many cases. They also have much higher interest rates than would be the case if you were getting a conforming or FHA loan. These loans do still have to abide by some rules. For example, they have to abide by the Ability to Repay Rule. This rule basically ensures that you can afford the loan are not just being provided the loan in order for the lender to make a quick profit while putting you into a financial bind. The lender still has the responsibility to carefully evaluate your financialsituation to determine if you could afford the loan. This means determining that you have adequate income that is supposed to continue for the foreseeable future; plenty of assets; the ability to care for any court ordered debts; and a reasonable debt-to-income ratio.

Lenders do still have the ability to provide loans for borrowers that exceed the Qualified Mortgage Rule of a 43% maximum debt ratio or provide loans with risky terms, such as interest only payments or rates that will adjust. Lenders will not be backed up in the case of default on these loans, however, as they do not meet the Qualified Mortgage guidelines. This could mean that the lender will have to buy back the loan from an investor should you default. As you can see, there is risk on both sides, but the biggest risk to you is the amount of the interest rate you are going to pay and the length of time you are going to have to pay it. If you have a prepayment penalty on your loan, for example, you are stuck in that interest rate until that prepayment penalty expires. If your credit and financial situation has improved by that point, you can then refinance into a more lucrative loan, but you will have to work hard to get to that point.

As you can see there are good and bad sides to both loans. The bottom line is that you have the ability to get a loan; it just depends on what you are looking for. If you are going to be in the home for a long time, you will have some decision making to do. The FHA loan will require you to pay MI for the life of that loan, which is obviously an added expense. Subprime loans do not have MI, so there is a price difference there, but if the interest rate you would get on a subprime loan is so high that it ends up to be more expensive to have that loan, you may want to opt to pay the MI on the FHA loan. Every case is different; it comes down to crunching the numbers to see which payment is the lowest for you for the longest length of time.

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