Non-Qualified Loan

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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The Quest for Finding Non-QM Borrowers

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The Quest for Finding Non-QM Borrowers

Non-qualified loans make up 9% of the total mortgages originated in 2016. This goes to show that there is a market, a demand for non-QM loans among today’s homebuyers. The question is: who are these potential borrowers of non-QM loans? Where can loan officers find such non-QM borrowers?

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Identifying Non-QM Borrowers

Angel Oak, a wholesale lender who originates and services loans and sells them on the secondary market, is offering solutions geared toward tapping this “ massive untouched market” of potential borrowers of non-qualified mortgages.

These non-QM loan borrowers may have these characteristics:

  • Don’t qualify for agency loans backed or guaranteed by GSEs, Fannie Mae and Freddie Mac or GOCs like Ginnie Mae.
  • In self-employment.
  • Need alternative documentation for income verification.
  • Have low FICO scores.
  • Have a recent derogatory record, e.g. foreclosure, bankruptcy.

Qualifying These Non-QM Borrowers

Aside from opening the credit box for non-QM borrowers, loan officers offering nonqualified loans in their portfolio can increase their competitiveness in the mortgage market.

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According to Angel Oak, who recently completed its third non-QM securitization of $146.4 million, finding these potential borrowers is the first step. And they can be found through builders, accountants, realtors, and or financial advisers who closely work with these individuals.

These professionals can be considered as potential sources of referrals. Loan officers will have to educate these professionals about non-QM loans and their specifics. When the time comes that a client of such professionals will need a non-QM loan, they can recommend non-QM loan officers they know to that client.

Loan officers will also be given access to a proprietary tool that speeds up the qualification process. They can input info such as FICO scores, loan-to-value ratio, and loan amount, which can determine if a borrower is qualified for a non-QM. Loan officers can also use this tool to submit mortgage prequalification requests.

For borrowers whose profile might not take them to the traditional mortgage path, non-QM loans represent one possible route they can take. And there are many avenues to explore that option.

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

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

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:

  1. 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.
  2. 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.

Depending on your situation, you could get a mortgage loan.»

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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