Non-Qualified Loan

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.

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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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Why the Qualified Mortgage Guidelines Make Jumbo Mortgages Less Available

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Why the Qualified Mortgage Guidelines Make Jumbo Mortgages Less Available-NONQUALIFIEDMORTGAGE.COMJumbo mortgages used to be a dime a dozen and you can even find those that did not require income verification, which was a dream come true for wealthy borrowers that did not have a steady income but had plenty of money. Today, however, the times have changed and everything needs to be verified and re-verified. Getting a jumbo loan is not impossible, but it definitely takes more work because of the risk that lenders are taking on – if a borrower were to end up in foreclosure with a jumbo loan, they could sue the lender stating that the lender did not do due diligence when it came to ensuring that the borrower truly could afford the loan. This leaves lenders in the lurches – do they offer jumbo loans or not?

Debt Ratio is the Biggest Hurdle

The debt ratio of a borrower is one of the largest hurdles to jump through with a jumbo loan and it makes sense why. If you are obtaining a loan for $1 million, you are going to have a very large mortgage payment. This in turn means that you need to have a very large income. Chances are you do have that large income because otherwise you would not be looking at such expensive homes, but if your income is not verifiable or not able to be used in the amount you thought it would, it could make your debt ratio much higher than you anticipated. In previous years this would not have mattered – lenders were willing to take the risk. Today, not only are they not willing to take the risk because of the high level of default, but the government is making it so that it works against them if they do take the risk.

The Qualified Mortgage guidelines plainly state that any loan with a debt ratio over 43% is considered a non-Qualified Mortgage. What does that mean for lenders? It opens up the possibility of you suing them should you lose your home. On the other hand, if the debt ratio was 43% or lower, the lender is protected from a consumer lawsuit as long as all of the other QM guidelines are in place. Because the debt ratio is usually the only problem, it has proven to be the number one reason why jumbo loans cannot be provided.

Jumbo Lending Terms are Changing

The terms of jumbo loans are also going through a tremendous change. Prior to the housing meltdown, it was not uncommon to see jumbo mortgages with interest only payments or negative amortization. Today, those terms are not allowed under the Qualified Mortgage guidelines. Again, this means if the lender provides these terms, the loan is not protected under the QM rules. Lenders are forced to provide borrowers with a fully amortizing jumbo loan, which depending on the amount, could mean very large mortgage payments for the next 30 years. There are borrowers out there that can afford these payments, but there are many others that cannot afford them.

The Verification Requirements are Changing

The type of verification allowed for jumbo mortgages is also changing. It was not unheard of to have stated jumbo loans in the early 2000’s, but today that just does not happen. Everything needs to be verified, which can pose to be a serious problem for those borrowers that are self-employed, which most million dollar income earners tend to be. They do not have W-2s and paystubs to show their income. Instead, they have bank statements and tax returns, but even the tax returns might not show as much income as they actually make because of the numerous write offs they can utilize in order to decrease their tax liability. If a borrower cannot supply tax returns supporting his income, or at the very least, bank statements over the last year showing a steady cash flow, chances are the jumbo loan will not be approved today.

Higher Interest Rates

As the mortgage decline gets further and further behind us, lenders are willing to take smaller down payments. The term smaller, however, is rather relative as if you think about it, even a 10% down payment on a $1,000,000 loan is $100,000, which no matter who you are talking to and how much money they have, that is a significant amount of money. The problem here, however, is that banks still see that has a higher risk because a 10% down payment means the loan has a 90% LTV, which in the eyes of the bank is risky. This means they are going to charge you a higher interest rate. Depending on the exact circumstances, that interest rate could be as much as 1% higher than the conforming rates, which on a high loan amount can be a significant amount of money. Now most jumbo borrowers are willing to take that chance in order to invest their assets in other areas rather than in a house that is going to appreciate slowly, so it is a 50/50 gamble for the jumbo borrower.

In the end, jumbo mortgages are becoming more scarce just because of the tighter restrictions being placed on the lenders. The government wants to ensure that another housing crisis does not happen and in the meantime, are making it harder for everyone to get a loan. This does not mean that jumbo mortgages are impossible to get – they are out there and many lenders are just keeping the loans on their own portfolio in order to avoid the QM guidelines, but many banks have to abide by these rules because they don’t have the capital to keep the loans. In the end, just keep shopping if you are in need of a jumbo loan and have the credit and assets to make it work.

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Why Subprime Loans are Necessary Today

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If you say the word “subprime loan” to a banker, you will likely see him cringe in return. Bankers do not like the term subprime any longer and are not making subprime loans as of today, so to speak. What they are offering, are loans with a different name – Non QM Loans, which stands for non-Qualified Mortgage Loans. That sounds a little better, doesn’t it? It could be just because of the tarnished name that subprime got over the years of the housing crisis, but whatever the case may be, non QM loans are making a comeback and a necessary comeback at that.

Subprime Loans get more people into homes, let’s get your family into one»

Qualified Mortgages are Not for Everyone

A qualified mortgage is a mortgage that meets very strict guidelines. These are the mortgages that Fannie Mae, Freddie Mac, FHA, VA, and the USDA will purchase and/or guarantee. These loans fit a perfect mold and are a perfect fit for certain borrowers – but not all borrowers! Unfortunately, the housing crisis did not only hurt the banks, it hurt consumers too. Many of these consumers have not quite bounced back to the point that they would fit the mold of standard, conventional lending. This leaves them without the ability to get a home, unless they obtain a non-QM loan. Getting around the QM guidelines, these lenders are requiring other mitigating factors to make up for whatever it is that prevents the consumer from falling under the Qualified Mortgage guidelines. Typically, it is the debt ratio that is making these loans non-qualified as 43% is the maximum to qualify. The borrowers that have lower credit scores are naturally going to be charged a higher interest rate, which then pushes their DTI over that threshold – making them “subprime.”

Getting More People into Homes

The Qualified Mortgage guidelines are pushing people that had recent credit issues away from owning a home, which is why the non-QM loans are making a comeback. These are the loans for people that had bad things happen to them – maybe they suffered a bankruptcy or foreclosure or maybe they defaulted on several credit lines as a result of losing their job or being downsized. These life events may have passed for these people and they are trying to make a name for themselves again, but with the stricter mortgage guidelines in place, it is becoming impossible.

Qualified Mortgage is not for everyone, consider a Non-QM loan»

Subprime Means Something Different Today

Just because a loan is non-QM today, does not mean that it must not meet the Ability to Repay Rules – yet another rule put into place by the Dodd-Frank Act. This rule states that each borrower must be able to pay the loan by proving their income and assets; be able to verify their employment; have all payments figured into their debt ratio that apply to the house as well as other monthly obligations; and have satisfactory credit history. To sum it up, it means that banks must do their due diligence to ensure that a borrower can in fact, afford the loan despite the slightly higher interest rate that may be charged. Lenders are still unable to charge excessive fees or provide risky terms, such as negative amortization or interest only payments. Basically, the borrowers allowed the non-QM loans are those that have a credit history that does not allow them to qualify for a standard loan yet they can prove that they can afford the loan.

If you are looking for a loan and do not fall within the conforming or FHA guidelines, non-QM loans could be your best bet. As long as you have compensating factors for your lower credit score or poor credit history, such as any of the following, you may have better luck than you think at getting a loan.

  • Excessive reserves/assets
  • Low debt ratio
  • High down payment
  • Stable employment history

More and more investors are realizing the profits to be had in the non-QM lending industry and the benefit it will have on the economy. Many lenders are still keeping these loans on their own books, but as more and more investors come forward, the funds will begin to pool and more non-QM loans will begin to flood the market, making getting a loan easier yet today, but not as easy as we saw in the early 2000’s.

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