Refinancing With Non-QM Loans
In this guide, we will cover refinancing with non-QM loans. If you bought your house using a conforming or non-QM loan, refinancing with non-QM loans can be a benefit for you. People refinance for many reasons. What is refinancing? When you purchase a home, you get a mortgage loan to buy it. The money goes to the seller who is selling the house. When you refinance, you get a new mortgage and pay off the first mortgage. In order to discuss refinancing with non-QM loans, we must first talk about what a Non-QM loan is. In the following sections of this guide, we will cover refinancing with non-QM loans.
What Is a Non-Qualified Loan?
A Non-QM loan (non-qualified) is one that falls outside the guidelines of Fannie Mae or Freddie Mac. What are Fannie Mae and Freddie Mac? Fannie Mae and Freddie are the nation’s two largest government-sponsored enterprises (GSEs). The U.S. government first established Fannie Mae in 1938. During this time, the Great Depression, almost a quarter of the population’s homeowners lost their homes due to foreclosure. The lenders (Banks) did not have the money to loan out for mortgages.
Non-QM Loans Versus Fannie Mae and Freddie Mac Backed- Mortgages
Until 1970, Fannie Mae held a monopoly on the second mortgage market. It was in 1970 that the Freddie Mac organization was developed. Freddie Mac and Fannie Mae control about 90% of the nation’s secondary mortgage market. These organizations help bring capital to the U.S. Housing market and are formed by Congress.
Non-QM loans do not conform to government and/or conforming agency guidelines. Non-QM loans are portfolio loans. They do not have to meet any federal agency mortgage guidelines or Fannie Mae and/or conforming loan guidelines. Borrowers who do not meet Fannie Mae and/or Freddie Mac guidelines can qualify for non-QM loans. Non-QM mortgage lenders are often open-minded and use the common sense approach when using mortgage underwriter discretion.
The Goal and Role of Fannie Mae and Freddie Mac
The goal is to provide stability, affordability, and access to funds to the mortgage industry. This means that they buy mortgages from lenders. They then either hold the loans or package them into mortgage-backed securities (MBS) that are then sold. This works to provide liquidity to the mortgage market because when they purchase the loans from the lenders, it ensures that individuals and families buy homes, investors can purchase property, and have a stable supply of mortgage money.
Although Fannie Mae and Freddie Mac try to make the agency mortgage guidelines make lending requirements reasonable for borrowers to meet, there are borrowers who do not meet conforming loan guidelines. Borrowers who do not meet conforming loan guidelines can opt to qualify with non-QM loans.
What Are Freddie Mac And Fannie Mae’s Guidelines?
In order to have a qualifying loan that falls under the guidelines of Freddie Mac and Fannie Mae, the loan must conform to Fannie Mae and/or Freddie Mac agency guidelines. In order to have a qualifying loan that falls under the guidelines of Freddie Mac and Fannie Mae, the loan must meet either Fannie Mae and/or Freddie Mac meeting standings with regards to credit, debt-to-income-ratio, loan limit, and other agency standards. People who do not meet Fannie Mae and Freddie Mac agency guidelines, need to see if they qualify for non-QM loans.
Conforming Loan Limits
A conforming loan limit is the maximum amount that you can borrow. Every year, the Federal Housing Finance Agency (FHFA) sets a maximum conforming loan limit in median-priced areas as well as high-cost counties in the United States. This loan limit is preset and varies by state and county. For the lower 48 states, the maximum amount on a one-unit property in median-priced counties in the United States for 2022 is $647,200. For Alaska and Hawaii, along with certain high-cost counties, the maximum is $970,800. If the amount of money for a property is above county limits, this would be a jumbo loan and is therefore not a conforming loan. The benefit of non-QM loans is there is generally no maximum loan limit.
Loan to Value Ratio On Conforming Versus Non-QM Loans
The Loan to Value Ratio (LTV) affects how much down payment you will need to make. This is the amount of the loan you will be taking out vs. the value of the property you wish to purchase. In order to meet the criteria for a conforming loan, you need an LTV of no more than 97%, which will be a 3% downpayment. Non-QM loans have a minimum 20% down payment requirement or an 80% LTV on rate and term and cash-out refinance.
Debt-to-Income Ratio Guidelines on Conforming versus non-QM Loans
The Debt to Income (DTI) ratio is factored in by taking the amount of debt you owe each month, which includes credit card bills, car payments, loans, and rent or mortgage vs. your income each month. Conforming loans require a DTI of below 50%. Non-QM loans normally have a 50% LTV cap. Some non-QM mortgage lenders have debt-to-income ratio caps up to 50% LTV.
Credit Score Guidelines on Conforming versus non-QM Loans
It would help if you had a credit score of 620 or higher for a conforming loan. Your credit score is factored by many things, such as the types of debt you have, how long you have had credit cards, how much you owe on your credit cards, and most importantly, if you have delinquent or missed payments. The minimum credit score requirements on non-QM loans depend on the individual non-QM mortgage lender.
Types of Non-QM Loans
If you do not fall into the Conforming Loan guidelines, refinancing with non-QM loans may be an option. There are government loans that do not follow those specific guidelines set by Fannie Mae and Freddie Mac, Government Loans such as FHA, USDA, and VA loans. The requirements are less stringent for government-backed loans because lenders have a sort of guarantee that even if you default on the loan, there is this government entity that insures it. Non-QM loans have no set government and/or GSE agency guidelines. Each non-QM mortgage lender has its own lender requirement.
FHA loans
An FHA loan is a loan insured by the Federal Housing Authority (FHA). There are two types of refinancing with an FHA Loan, streamline or cash out.
FHA Streamline Refinance
For a streamlined refinance, you need an existing FHA mortgage that is at least six months old. This loan must be in good standing as well. You are not able to get cash out of this loan, at least not more than $500. This is a popular refinance because you do not need to supply a lot of documentation.
FHA Cash-Out Refinance
For Cash-out refinancing, you borrow more than the amount you owe on your current mortgage and keep the cash. The requirements for a cash-out refinance include living in the home for at least 12 months, having a 12-month record of paying your loan payments on time, have a loan-to-value ratio of 80% or less. Have a minimum credit score of 500 and a debt-to-income ratio of 50% or less. You will also need to get a new appraisal on your property.
USDA Loan Refinance Guidelines
A United States Department of Agriculture (USDA) loan is a government loan backed by the USDA. If you are going to refinance a USDA loan, you will generally use the USDA streamline assistance refinance.
USDA Streamlined Assistance Refinance
You lock in a lower interest rate and a lower payment with minimal paperwork for the USDA Streamlined Assistance Refinance. No credit approval is needed, meaning that your lender does not need to check your credit report or debt-to-income ratio. To qualify, the new loan must lower your monthly mortgage payment by at least $50. The current mortgage must have been paid on time for 12 consecutive months, and the home must be used as the borrower’s primary residence. Because the USDA is built for a lower-income population, you must still earn less than the USDA income limits.
Conventional Loan Refinance Guidelines
For a conventional loan refinance (non-streamlined), you can remove mortgage insurance or take out cash. This USDA refinance option requires you to meet the USDA’s credit and Debt to Income requirements. The current mortgage must have been paid on time for 180 consecutive days prior to the refinancing request, and you must have had the mortgage for at least 12 months before the request. The home must be the primary residence, and the original borrower must remain on the loan. As with the Streamlined loan, the borrower’s income must still be below the USDA’s income limits.
VA Loan Refinance Guidelines
The VA loan is a loan that the Veterans Association insures. These loans are solely for the United States Military individuals and their qualifying families. The VA mortgage refinancing is not done through the VA itself but through a VA-approved private mortgage bank, credit union, or mortgage lender. There are two typical VA refinance options for our military using V.A. loan programs, the Interest Rate Reduction Refinance Loan (IRRRL).
VA Interest Rate Reduction Refinance Loan
The VA Interest Rate Reduction Refinance Loan, also known as the V.A. Streamline Refinance loan, is suitable if you are trying to get a lower interest rate. In order to use this loan, you must already have an existing V.A. loan. The new rate that you are applying for must be lower than your current rate. You are unable to take out cash with this type of loan.
VA IRRRL Credit Requirements
Typically, this loan does not require a lot of paperwork, but you will need to meet the minimum credit score, minimum income requirements, and no delinquent mortgage payments in the last 12 consecutive months. With the IRRRL, you don’t usually need large amounts of money upfront, and you can roll the closing costs into the loan. What is different with the loan is that you do not need to live in the home currently, but it must have been your primary residence at some point.
VA Cash-Out Refinance Mortage Guidelines
VA Cash Out refinancing is for any veteran that has a conventional loan or a V.A. loan. You will need to meet the required credit score, get a VA-approved appraisal (Like when you initially acquired the mortgage), and the home must be your primary home. You can take out up to 100% of the appraised value of your home, which is why another appraisal is necessary.
Jumbo Loan
A jumbo loan is a loan that is more than the conforming loan limits set by your area. A jumbo loan can come with higher interest rates and stricter requirements due to the high amount of the loan. These higher requirements include a higher credit score, starting at 680, a debt-to-income ratio of no more than 36%, and cash reserves, which vary depending on your lender. Jumbo loans are also manually underwritten, which means that instead of being automatically reviewed, an actual financial professional is going through your documents with a fine tooth comb to ensure you meet qualifications.
Jumbo Cash-Out Refinance Guidelines
With a Jumbo Loan Cash Out refinance, you can take out money from your home to cover repairs or cover bills that you have. Sometimes, people use these loans to consolidate bills into one payment. This will only work if you have a large amount of home equity.
Jumbo Loans Refinancing With Non-QM Loans
If you have a non-conforming loan and want to refinance into a conforming loan, you can also do that if you meet the limit. Conforming loans are easy to find, as many lenders offer them. The requirements can vary from lender to lender, but all will fall into Fannie Mae’s and Freddie Mac’s basic guidelines.
The only trouble people have are meeting the requirements, as described above, with a qualifying credit score, debt to income ratio, and loan to value ratio. Remember that qualifying or conforming loans generally have lower interest rates and fees. This might be enough to make a person refinancing with Non-QM loans to a qualifying loan as long as her financial health and credit are allowable.
Steps to Refinancing With Non-QM Loans
When you decide to refinance with non-QM loans, you need to determine what your goal is by doing so. This can assist you in understanding which financing option will be best for you. Some reasons people refinance are to reduce their monthly mortgage payment, to get a shorter term (maybe 30 years to 15 years), to get a longer term to lower their monthly payment, switch from an adjustable rate to a fixed rate loan, to eliminate private mortgage insurance (PMI), or to take equity out of home in cash-out finance.
Once you decide what your goal is and have checked your credit, DTI, and LTV ratios, you can shop around for lenders that meet your needs. You can refinance with a conventional loan if you have as little as 5% equity, but you will definitely get better rates the more equity you have. If you have over 20%, you won’t have to pay personal mortgage insurance, and there are fewer fees. You will want to get all your documents together, such as paystubs, W2s, bank statements, etc., or anything else the lender asks for. If you can gather what you may need ahead of time, it will lessen how long the process takes from start to finish.
Choosing a Lender For Refinancing With Non-QM Loans
Once you have picked a lender and gotten your documents and finances in order, you can apply. If you choose to apply at multiple lenders, try to do so within a two-week period so that it doesn’t have a significant impact on your credit score. Although there are some refinance options that do not need a new appraisal, if your lender/refinance type requires one, you will have to comply. This will cost a few hundred dollars.
When it’s time to close, you have to bring in the money for the fees and down payment. Keep in mind that you may be able to finance those costs, but you will have to pay a higher rate or total loan amount. You also want to consider if there is a prepayment penalty for paying off your loan early because that is what a refinance is. It’s starting an entirely new loan after paying off the original.