One of the concerns mortgage lenders have always faced is the ability of a mortgage borrower to repay their loan. After the mortgage meltdown occurred in 2008, more lenders than ever focused their attention on borrower's ability to repay because many banks were sued because of high risk loans they provided borrowers.
In response to the mortgage crisis, Congress enacted the Dodd-Frank Bill which set up specific criteria mortgage lenders must use to indicate a borrower was qualified to take out a mortgage. These are the typical criteria we now see on loans guaranteed by the VA, FHA, FNMA, Freddie Mac and for Jumbo mortgages. Unfortunately, some of the criteria excluded certain borrowers who could pay back their loans but for various reasons did not meet the criteria. This is when more lenders began offering non-qualified mortgages (non-QM). Since we get a lot of questions about these types of loans, we thought we'd explain the reasons for them, as well as the general types of non-QM loans which may be available.
General Reasons for Non-QM Loans
Many borrowers are capable of repaying a mortgage but for various reasons do not meet the "qualified" borrower model which is included in the Dodd-Frank Bill. Some of the reasons may include:
- Debt to income - borrowers who have high amounts of revolving debt may still be able to pay a mortgage, but their income and debt ratios are too high
- FICO score issues -in some instances, a borrower may have suffered a short-term financial problem which created a series of late payments on their credit report. Even after the issue has been resolved, these late payments remain on your credit report
- Issues with self-employment - a borrower who has been self-employed for less than two years, or a self-employed person who maximizes deductions making their income look lower may also have issues qualifying for a mortgage under the new guidelines
Keep in mind, none of these issues makes these loans riskier than a qualified mortgage since lenders will still take the necessary steps to ensure the borrower puts down a substantial down payment (usually 20 percent or more) and has enough income to support the loan.
Types of Non-QM Loans
In order to assist a borrower in qualifying for a mortgage loan, lenders offering non-QM loans offer various programs. Some of these may include a loan with a longer amortization, interest only loans, higher debt ratios, or be more flexible about income verification.
Explaining the Variances
Generally, mortgage loans are amortized over 30 years, with a non-QM loan, the amortization may be extended over 40 years. This means a borrower is going to be required to pay a lower monthly payment which can help them qualify for a mortgage.
Interest only loans are typically balloon mortgages. These can be helpful for a borrower who may have had a temporary financial setback which resulted in a FICO score issue. Once the borrower has repaired their credit, they may qualify for a qualified mortgage loan.
Income verification is often a challenge for those who are self-employed. Using the Non-QM loan, a borrower may be able to use their bank statements which show regular deposits to verify their income. Additionally, in some instances, a borrower may have other assets which can be used to show the borrower is able to quickly liquidate an asset to pay a mortgage.
Since most lenders prefer to work with borrowers who have a debt to income ratio lower than 43 percent, many borrowers have a hard time meeting this if they are purchasing a more expensive home. Non-QM loans include Jumbo mortgage offerings for borrowers with a debt to income ratio in excess of 43 percent.
The real estate market is more competitive than ever before, and homes are more expensive. Borrowers often do not meet the typical requirements for a traditional qualified mortgage but in many cases, they will qualify for a Non-QM loan.
If you are one of the many potential homeowners in the Washington DC area who feels they may not fit the necessary guidelines for a conventional mortgage loan, contact First Savings Mortgage today and let us help you realize your dream of home ownership.