Breaking Down Non-QM Lending
If you are looking to buy a house but don't have typical income or credit, you might feel like you'll never get your own home. While you may not qualify for the standard, qualified loan, you don't need to give up hope. Luckily, there are non-qualified mortgage loans that exist for people like you. These non-QM loans may have had a bad rap in the past, but they are making their way back into popularity today.
Here is what you need to know about non-qualified mortgages.
What is a qualified loan?
After the housing crisis in 2008, the Consumer Financial Protection Bureau required lenders to maintain strict guidelines. Lenders could lower their risk by making sure employed borrowers were able to repay their loans. There were four main components:
- Able to repay
According to the ability-to-repay rule, lenders have to document your income, employment, monthly debts, and assets before lending you a penny. This documentation would ensure you can afford the loan.
- Restrict loan features
This rule prohibits lenders from using risky loan features. For example, loan terms that exceed 30 years or interest-only mortgages, are all considered dangerous when compared to traditional loans.
- Caps on fees
Loan amounts over $100,000 cannot have lender fees over three percent of the loan.
- Limiting how much income goes towards payments
Banks use a formula called the debt-to-income ratio (DTI). This formula is a percentage of all of your monthly debts divided by your pre-tax monthly income. A qualified mortgage loan requires a DTI of 43% or lower, although some lenders allow up to 50%.
What is a non-QM loan?
Simply put, any loan that doesn't meet the standards of a qualified mortgage is considered a non-qualified mortgage. Non-QM mortgage lenders have more flexibility. These loans, however, do not reject the regular test of being able to repay a loan. The decision on one's ability to repay is just found differently.
Who uses a non-QM loan?
Borrowers with non-traditional income are often attracted to non-QM loans: self-employed, real estate investors, foreign nationals, and those looking for riskier loans, have a significant asset or have insufficient credit. Those with sporadic pay schedules or multiple income streams may not appear to be able to repay a traditional loan. By looking at the person's cash flow, lenders can make more informed decisions regarding applicants.
Making a comeback
We are in a season of higher prices for home and higher interest rates. Mix that with the number of people who are working for themselves or who earn extra income through the gig economy. Those looking to purchase a new home are finding it quite difficult to qualify for a qualified loan. At the same time, the number of people who want to buy a house isn't going down.
Disqualifying borrowers due to their less-than-traditional income stream can damage the real estate market and the economy as a whole. Many banks and niche lenders are taking non-QM loans more seriously than they had before. Borrowers still need to explore options, pay attention to fees, and make prudent decisions, but even those with atypical income and credit are not out of the running for a new home.