Non-Qualified Loan

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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Are Non-Qualified Mortgages Bad for Borrowers, Lenders?

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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.

»Are you a first-time homebuyer? Interested in getting a Non-Qualified Mortgage?»

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!»

Which VA-Guaranteed Loans Would be “Qualified Mortgages” or “QMs”

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Which VA-Guaranteed Loans Would be “Qualified Mortgages” or “QMs”

Qualified Mortgages or “QMs” have become the talk of the town in the mortgage industry. This all came about in the wake of the mortgage crisis. Lenders that were supplying loans to unqualified borrowers were what set the mortgage industry into a tizzy. In an effort to halt that from occurring again, the government put forth strict rules that all mortgage agencies must follow, including the VA. The government agencies that include the FHA and VA, however, were allowed to create their own rules regarding the Ability-to-Repay and QM rules. In general, the VA has claimed that all VA guaranteed loans fall under the QM status – what varies is to what degree they fall under it.

Understanding QM Loans

Qualified Mortgages or “QMs” are those mortgages that are exempt from any type of borrower litigation against the lender. They are protected because the lender can guarantee without a doubt that the borrower can afford the loan. This way, if down the road, the borrower becomes unable to afford the loan, it is not because of any fault of the lender – the lender did its due diligence in determining the affordability to the borrower. There is another aspect to the QM loan, however; this is called the Rebuttal Presumption Status and it differs from the Safe Harbor Status, which is when the lender is completely exempt from the possibility of litigation.

The Rebuttal Presumption Status still allows a borrower to stake claim against the lender, stating that the lender did not do their part in determining the affordability of the loan. There is slightly less protection to the lender with the Rebuttal Presumption Status.

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How VA Loans can Gain Safe Harbor Status

Every standard VA guaranteed loan has Safe Harbor Status because all aspects of the loan are evaluated before funds are disbursed. This means the lender and the VA can without a doubt confirm that the income, debt ratio, costs, and benefits of the loan are good for the borrower. These rules even apply to the VA IRRRL program as long as the following requirements are met:

  • At least six payments must have been made on the current VA loan
  • Only one late payment on the current VA payments is allowed in the last 6 months (or 12 months if the loan has been in existence that long)
  • The time that it takes to make up for the costs of the refinance versus the savings on the mortgage payment cannot exceed 3 years
  • The loan meets the requirements to dismiss income verification or the income is verified appropriately

Any VA IRRRL that does not meet the above requirements would fall under the Rebuttal Presumption Status, giving the borrower a little more leeway in going after the lender should they default on their loan. The most common examples include loans that are not at least six months old or those that have excessive fees that take longer than 36 months to recoup.

In order for a VA IRRRL to not require income verification, there must not be more than one late housing payment in the last 12 months; the principal balance must remain the same or lower (not higher); the costs for the loan do not exceed 3 percent of the loan amount; the interest rate is lower; and there are no risky amortization features. If a loan does not meet these requirements, the income must be verified in order to be a Safe Harbor Loan.

In summary, all VA loans are a QM loan, the degree just varies. The good news is that every borrower has some type of protection and the VA is very careful about who they lend to and how much they lend so as not to put any borrower in danger of losing their home.

»Do you qualify for a QM? Click here to find out!»