non-qualified mortgages Archives

Survey: Mortgage Purchases to Increase in 2017

July 10, 2017 By Chris Hamler

With rising home prices, interest rates inching higher, and housing inventory still in the low, it’s only logical to predict that mortgage purchase volume this year would dwindle. But a recent survey by Lenders One Cooperative says otherwise.

Out of the 200 lenders that participated in the survey, 94 percent expect an increase in mortgage purchases, a significant march up compared to last year’s 62 percent.

Furthermore, more than half of the lenders (59 percent) expect a rise in first-time homebuyers. This is in line with a report from the National Association of Realtors released recently showing a relative increase in first-time homebuyer’s share in mortgage purchase originations from 2015 to 2016.

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Non-QMs on a comeback

Consumer debt is seen as a potential risk factor that could challenge growth. Almost majority of the lenders (93 percent) said they already dispense Non-QM loans, though most of this bulk come from jumbo loans – a loan choice that increased parallel to the rise in home prices.

Will the prediction deliver? Bryan Binder, CEO of Lenders One believes so, if the lenders shift their focus into the purchase market and use tools and solutions that could improve efficiencies in business.

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Downpayment Can’t Be Verified as Asset on Non-QM Loans, Says CFPB

May 1, 2017 By Justin

The Consumer Financial Protection Bureau released its spring 2017 Supervisory Highlights touching on, among other things, the ability-to-repay rule as it relates to the origination of non-qualified mortgages or non-QM loans. In line with that, the Bureau clarified that a downpayment can’t be treated as an asset for verification purposes under the ATR.

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Verification of Income and Assets

The ATR rule requires lenders to make a reasonable and good faith determination of a borrower’s ability to repay his/her mortgage. Consequently, the ATR has set minimum guidelines with which lenders can incorporate in their own underwriting standards.

To form the basis of a borrower’s repayment ability, the lender will consider the following eight factors under 12 CFR 1026.43 (c) (2).

(i) the consumer’s current or reasonably expected income or assets, other than the value of the dwelling, including any real property attached to the dwelling, that secures the loan;
(ii) if the creditor relies on income from the consumer’s employment in determining repayment ability, the consumer’s current employment status;
(iii) the consumer’s monthly payment on the covered transaction, calculated in accordance with paragraph (c) (5) of the ATR rule;
(iv) the consumer’s monthly payment on any simultaneous loan that the creditor knows or has reason to know will be made;
(v) the consumer’s monthly payment for mortgage-related obligations;
(vi) the consumer’s current debt obligations, alimony, and child support;
(vii) the consumer’s monthly debt-to-income ratio or residual income; and
(viii) the consumer’s credit history.

The Bureau noted that a lender can verify a borrower’s income or assets as set forth above and on reliable records from third-party sources.

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If a lender deems to verify a borrower’s assets in making non-QMs; it should reasonably and in good faith determine that the verified assets were indeed sufficient to establish the borrower’s ability to repay.

Moreso that the lender who relied on those verified assets and not on income can properly determine that income is not necessary for a reasonable and good faith determination of the borrower’s repayment ability.

Downpayment not an Asset

In its supervisory highlights, the CFPB made clear that downpayment is not an asset and is excluded from the verification of either assets or income under the ATR rule.

The Bureau put emphasis on point (i) above whereby the “value of the dwelling, including any real property attached to the dwelling, that secures the loan” is excluded from a borrower’s current or reasonably expected income or assets to be verified by the lender.

A downpayment forms part of the house securing the QM loan. While the size of the downpayment can decrease the loan amount and thus enhance the chances of it getting repaid, there is no direct link between the downpayment size and ability-to-repay performance going forward. Add to that the downpayment is not part of the ATR’s minimum standards for underwriting.

“Therefore, standing alone, down payments will not support a reasonable and good faith determination of the ability to repay,” the CFPB wrote.

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Finding a Non-QM Mortgage Lender

February 13, 2017 By Chris Hamler

Finding a non-qualified (non-QM) lender today is getting more and more easy compared to the early years post the 2008 crisis. The challenge is to find the right one that understands and caters to your unique borrower needs.

After the Dodd-Frank Act split mortgage categories into qualified and non-qualified in order for lenders to be more meticulous of the loan products they offer and who they give them to, a significant portion of the borrower market were cut out off of the opportunity to get the financing they need.

These people are not necessarily subprime borrowers, but are those who might be holding two jobs or jobs by season, those who receive pay via commissions, and generally those individuals whose income may not come with regular paychecks and W2s but otherwise have good credit standing.

A non-QM loan usually takes the form of the following:

a) Interest only loans that require interest payments at the first part of the mortgage term. After this specified period, fully amortized payments are then paid.
b) Loans given to borrowers with debt-to-income ratio higher than 43 percent
c) Loans that use other methods to verify documented income
d) Loans that charge over 3 percent in origination costs

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All of the above are not allowed with FHA, VA, USDA, or other government-backed mortgage qualifications. And most people do not usually fall into this type. Hence why the non-QM market thrives.

It is of primary importance to evaluate your purpose for getting a Non-QM loan as that will help you determine which lender suits you best. Many non-QM lenders are specialists and cater to only a type or two of borrowers. Some prefer self-employed borrowers such as small-time entrepreneurs and businessmen, while others accommodate slightly risky borrowers with compensating factors.

Finding the right lender

When choosing which lender to get a non-QM loan from, you must consider a lender’s flexibility. It is the ability of the lender to flex their offers and make changes based on the nature of your situation as a borrower in need. This lender characteristic is easy to find in small, private lenders who keep their loans on their portfolio and do not sell them to secondary markets.

If such is the case, they do not have to adjust to the whims of their investors and are therefore more capable of making adjustments to their loan offers.

If you cannot find a specified non-QM lender in your area, you can try with your bank and see if they can arrange for a loan that fits your criteria. If they cannot accommodate your loan request, expand your search online.

Finding the non-QM lender to work with may require a bit of patience and extra effort, but with today’s looser mortgage guidelines, it is definitely not impossible. Start your search here.

One Major Benefit of Non-QMs? No PMI!

January 30, 2017 By Justin

Sure some loans cost a lot upfront with down payments as big as 40%. But these loans, e.g. stated income loans and jumbo loans, don’t carry a private mortgage insurance. PMI, which is required when you put down less than 20% in equity, will be included in your monthly mortgage payments. While other homeowners are finding ways to get rid of it, you don’t even have to worry about it when you get a nonqualified loan. Finding lenders is effortless, too.»

Private Mortgage Insurance: Why It Matters Not to Have One?

To be fair, PMI is useful for those who can’t produce or save up that much cash even with gifts for a down payment. They can still get a mortgage but they would have to protect the lender in the form of the private mortgage insurance.

Being your-not-the-usual mortgages, nonqualified loans generally require 20% upward for down payments. This spares their borrowers from the less savory aspects of the PMI, as follows.

1. It’s expensive. The PMI is usually between 0.50% and 1% of the loan amount. Supposing you took out a 5% down $100,000 mortgage and your insurance rate is 1%. That means $1,000 goes to your PMI a year or $83 is being added to your monthly mortgage payment.

While the most common way to pay the PMI is on a monthly basis, other lenders require that the PMI be paid upfront at closing. Some lenders may be the one to make the payment upfront but this cost will be passed on to you in the form of a higher rate.

Other mortgages like FHA loans require mortgage insurance premiums to be paid upfront at closing and in monthly fees.

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2. It’s not for you and won’t benefit you. You pay for a mortgage insurance as protection for the lender in the event you default on your loan. Neither you nor your children benefit from the PMI after you finish paying off the mortgage.

3. It’s difficult to cancel or terminate and in some cases, will remain. PMI can be removed if you have built 20% equity into the home or paid down your mortgage that you only owe 80%. In that case, you have to request the lender to cancel the mortgage insurance. Conventional lenders are required to terminate the mortgage insurance if your loan balance reaches 78%. Until your balance reaches any of those levels, you have to continue paying for the mortgage insurance.

The case with FHA loans is more complex as the annual MIP can be canceled if the loan is originated before June 3, 2013 and the unpaid balance is 78%. But the Upfront MIP portion of the FHA mortgage insurance premium is not cancelable.

Are you up for paying a large down payment now to avoid PMI or putting less down payment and pay a mortgage insurance later?

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Is There an Ideal DTI Ratio for QMs, Non-QMs?

January 23, 2017 By Justin

January marks the third year the CFPB has implemented certain rules for safer mortgages with improved protections. One characteristic that sets qualified mortgages and non-qualified mortgages apart is the debt-to-income ratio. For QMs, the DTI ratio should be 43% or less. If your DTI exceeds 43%, does that make your loan automatically nonqualified? Do non-qualified mortgages require DTI ratios, if at all?

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DTI Ratios and QMs

The CFPB’s ability-to-repay (ATR) rule requires the lender to verify a borrower’s income and debt load. These elements are embodied by the DTI, which measures your income relative to your debt. The resulting ratio, if it’s higher or lower, signifies that you are capable of repaying the loan or living precariously.

Calculating the DTI is essentially adding up all your debts for the month, mortgage, car loan and others. Once you get the sum, you divide it with your gross monthly income. For instance, you make $6,000 in a month and $2,000 of that goes to your debt. Then your debt to income ratio is 33%. Actual results may vary among lenders who have their own calculations.

In the example above, the DTI ratio is less than 43% and thus eligible for a qualified mortgage. But even if the ratio exceeds 43%, one can still obtain a QM. The CFPB allows for these exceptions:

Small creditors must evaluate the DTI but are permitted to underwrite QMs for those with a higher-than-43% DTI. For QM purposes, these are lenders whose loan portfolio is less than $2 billion the previous year and originated less than 500 closed-end residential mortgages subjected to the ATR requirements.
Larger lenders can originate loans with the higher than required DTI ratios but they must have made a reasonable, good-faith determination per the CFPB rules that the borrower can repay the loan.

Moreover, the DTI cap or 43% does not apply to government-backed loans like FHA and VA, or those eligible to be sold to Fannie Mae and Freddie Mac. These loans belong to GSE-eligible category of QMs.

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DTI Requirements for Non-QMs

Nonqualified loans are a go-to option when your DTI ratios are too high for a QM even with the exceptions. A high DTI ratio sends mixed signals to the lenders because your other debts could deter you from repaying your loan with them.

Accordingly, non-QM lenders allow for DTI ratios higher than 43% provided that your credit score/history is decent, your assets are adequate and verifiable, and your income is verifiable through documents other than the usual paperwork.

It’s thus not surprising why self-employed professionals and high net worth individuals are drawn to nonqualified loans. They are flexible enough to include borrowers whose debt-to-income ratios and income tend to shut them out of traditional mortgages.

Even with their less stringent guidelines, lenders of nonqualified loans are still required to do an ability-to-repay assessment.

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What are the Types of Non-QM Mortgages Available Today?

January 9, 2017 By Chris Hamler

Mortgages today are classified into two categories: qualified, and non-qualified. Qualified mortgages are designed to cater to individuals who can fully demonstrate their ability to pay back a loan. But a significant part of the American population does not fall within this category. Most businessmen or self-employed individuals, as well as freelancers or those who do not receive a steady stream of income may find it hard to qualify. This is where non-qualified mortgages come in handy.

Non-qualified mortgages (Non-QM) come in different forms, and target a different segment of the housing market. Let’s look into its variety.

Interest Only Non-Qualified Mortgage Products

With interest-only loans, you pay only the interest on the loan for a specified period. After this period expires, you are then liable to pay for the interest AND the principal, which could cause your monthly payments to balloon. If you are going to take this type of loan, be sure that you are well-prepared and have money to tap into by the time the interest-only period comes to an end.

Investment Property Loans

Investment properties are treated by the housing industry as business. Hence, loans for these properties do not have to abide by the rules set by the Dodd-Frank Act. This secures the variety of the type of financing an investor or borrower can get. Different lenders may have different sets of qualification guidelines for potential borrowers.

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Loans for High Net Worth Borrowers

Banks offer big loans for individuals whose net worth are significantly high. These individuals usually do not have a consistent income but do have a significant number of assets on their name. Thus, many banks offer loans that are based on assets rather than income. These assets must be verified (in lieu of the income) in order to qualify for the loan. These asset-based loans typically loan thousands of dollars or even millions to qualified individuals. However, borrowers must be able to maintain excellent credit and put a good percentage of the loan amount as down payment.

Non-Agency Mortgage Programs

Conventional, qualified mortgage lenders will deny your loan application if your debt-to-income ratio goes beyond the 43 percent limit. This poses a problem if you are receiving irregular income or are purchasing a property with a high loan amount. Thus comes non-agency mortgage programs to your aid. Through a non-agency mortgage, you can get around the 43 percent DTI cap and secure financing for your home. However, you must be able to demonstrate to the lender that you will be able to pay back the loan. Do not take a mortgage that is more than you can afford. Make an honest evaluation of your income and prepare to deliver.

Stated Income Loans

If you are having difficulty documenting your income, but need a home loan, you can opt for stated income loans. These types of loans target self-employed individuals. For stated-income mortgages, lenders do not look at your pay stubs and W2 forms as well as your income tax records. You just need to state your income and they take your word for it. Because of this, stated income loans are deemed risky and most of them has been eliminated especially after the housing crisis hit in 2008. However, there are still versions of stated income loans that exist. One of these are asset-verified loans. Compared to some of its predecessors, they have stricter guidelines and qualification requirements.

To get asset verified loans, your asset must be reflective of your income. Moreover, you must have money on your account that is enough to cover the loan expenses should something disrupt your income flow. Qualifications depend from one lender to another. But one thing is made sure: that you can afford to pay for the loan despite vague income records, and that you will be able to pay back what you owe.

If you are looking for financing but do not fit the traditional eligibility and qualification standards required by lenders, non-qualified mortgages could be your saving grace. However, these loans are risky and there are frauds who are always ready to pounce on the unsuspecting. When you head out shopping, make a criteria for your lender, and always be on the lookout for non-credible transactions.

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Are Non-Qualified Mortgages Bad for Borrowers, Lenders?

October 24, 2016 By Justin

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.

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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!»