As you may have found while looking for mortgage lenders, not all homebuyers fall into the same box. This can be for a variety of reasons, ranging from credit to income, and more. If you are not a traditional borrower a non-qm loan might be the right choice for you.
Potential homebuyers may even assume that they can't even get a loan because they don't know there are other options. A non-qm loan fills the gap by allowing those who don't qualify for traditional mortgages to still get the home of their dreams.
Unfortunately, many articles online jump right into discussing loans and mortgages without teaching you the correct terms to help you understand what they're telling you. This is where many potential homebuyers may give up. However, we've put together this list of terms to understand when taking out a Non-QM loan.
Commonly Used Terms During the Non-QM Loan Process
A Qualified Mortgage is a type of home loan that has stable features that make it likely that borrowers will be able to afford their loan. This mitigates much of the risk for lenders, which is why they tend to push for this type of home loan.
A Non-Qualified Mortgage (Non-QM) is a type of loan that doesn't meet the traditional standards of a qualified mortgage. It uses non-traditional methods to verify your income so that a borrower can get approved for a home loan depending on their unique situation.
Non-QM loans can help those who are self-employed, have non-traditional or seasonal income, or have difficulty qualifying for a traditional mortgage loan. It may also be the best solution for those with past credit issues.
Non-QM loans have guidelines that allow the lender to see your financial history very thoroughly before making a decision about whether or not to approve your loan.
Underwriting is the act that allows your lender to verify your income, assets, debt, and property details in order to approve your loan. It is behind the scenes, but your involvement matters. Your lender will most likely ask you for additional documents and have questions for you, depending on how much information you give them at the start of the loan process.
It is performed by an underwriter. An underwriter is a financial expert who will be taking a look at your finances to assess how much of a risk the lender will take on if they go ahead and give you a loan.
The underwriter is vital for the lender because he or she will help the lender make the ultimate decision about whether or not to approve your loan. The underwriter will also work with you to make sure you submit all of the proper documentation. Their main job is to make sure that you don't get a mortgage that you can't afford, making them a vital piece to the mortgage puzzle for both parties.
An underwriter performs many tasks, including:
- Investigating your credit history
- Ordering an appraisal
- Verifying your income and employment
- Looking at your debt-to-income ratio (DTI)
- Verify your down payment and savings
A person that has received money from another party or a financial institution under the terms that the money will be repaid is a borrower. In this context, the borrower is the person who is applying for the loan. If you're looking for a mortgage, you are the borrower.
Most borrowers will borrow money at interest, which means they'll pay a percentage of the principal amount to the lender as compensation for allowing them to borrow the money.
The lender is the bank, public, or private group that will give you the loan. A lender has expectations that the loan will be repaid. You will then pay back the lender based on their terms once the loan is approved. Repayment can include the payment of interest or fees and other terms.
As we previously mentioned, the underwriter will take a look at your debt-to-income (DTI) ratio. This ratio consists of all of your monthly debt payments divided by your gross monthly income. This final number allows lenders to measure your ability to pay back the loan monthly.
While DTI does help lenders determine whether or not to give you loan acceptance, it is not a full measure of affordability. There are general guidelines for a DTI ratio, but it can't ultimately determine whether or not you can afford the mortgage. DTIs don't take into account your expenses like health insurance, utilities, food, and others, so you'll want to budget beyond your DTI.
To qualify for a non-qm loan, lenders will expect to see a DTI of 46 percent or less.
Ability to Repay
The ability to repay (ATR) rule gives lenders an idea of whether or not you can repay your loan, which will be a determining factor if you are accepted or rejected for a loan. The ability to repay rule requires lenders to document your income, employment, assets, credit, and monthly debts before they give you any money.
This will help ensure that you can afford the loan. It is required by law that lenders evaluate the following underwriting guidelines to comply with the ATR rule:
- Current Employment Status
- Monthly Payments
- Credit History
When you are ready to start your home financing journey, we're here for you. If the banks and mortgage lenders in your area don't offer what you need or if they can't help because of a low credit score, it doesn’t mean you’re out of options. No matter who’s not on board with lending money to someone like yourself there is always an option available; even when it seems hopeless! We at Bydand Home Loans LLC understand that not all potential homeowners fall into the standard box.