FAQs About NON-QM Loans
In this mortgage guide about non-Qualified mortgages, we will cover FAQs about non-QM loans from clients and viewers of our mortgage news at Non-QM Mortgage Lenders
What Is A Non-QM Loan?
What is a Non-QM Loan? Non-QM stands for a non-qualified mortgage. This is also called a non-conforming loan. This home loan type is not required to meet the agency’s standard documentation requirements. The standards are set by the Consumer Financial Protection Bureau (CFPB). The Consumer Financial Protection Bureau helps consumers by making sure banks, lenders, and other financial companies treat them fairly. The CFPB also offers tools for individuals to learn about mortgages and how to protect themselves.
FAQs About Non-QM Loans on Safety and Protection From CPFB
Additionally, there are Non-QM loans that can include a wide range of mortgages. Included in these are
- Home loans with negative amortization
- Home loans with interest-only payments
- Home loans exceeding 30-year terms
Because the CFPB does not protect these non-QM loans, these mortgages are high risk for lenders. Due to the higher risk, they do not have the same level of assurance that the loans will not default or that they will be paid. However, because these loans do not follow the rules, lenders can be more relaxed and flexible with the borrowers in terms of income, credit, and other risks that they usually would not be able to be flexible with.
FAQs About Non-QM Loans Versus QM Loans
To understand non-QM loans, you must first understand QM Loans or Qualifying loans. In the Great Depression, one in four homeowners lost their homes. The banks did not have the money to lend out for people to purchase homes, and people did not have the funds to pay their mortgages. The Great Recession occurred in 2007 and lasted two years. Many individuals were unemployed and the world was in economic decline.
About The Frank-Dodd Act
The Frank-Dodd Act was enacted and put strict regulations on lenders and banks in order to protect consumers and stop another recession. The Great Recession had a massive impact on the housing market. Before this, lenders could give home loans to people with less than ideal financial history.
Previously, in order to give loans to individuals, they attached higher interest rates. This was done by determining the borrower’s likelihood of being able to repay the loan. This decided what the borrower would pay if, below the requirements, they were given subprime mortgages with high rates.
FAQs About Non-QM Loans Versus Sub-Prime Mortgages
A subprime mortgage loan is a loan that is offered to borrowers that have impaired credit records. This increased interest rate improved the lender’s profit, making up for the risky situation. Because these interest rates were so high, borrowers often could not maintain their monthly payments, making them default on the loan and foreclose.
FAQs About Non-QM Loans Versus Conforming Mortgages
This is where Fannie Mae and Freddie Mac come in. Congress created these two entities. The goal was to create affordability, stability, and liquidity in the mortgage market. Freddie Mac and Fannie Mae buy mortgages from the lenders, at which time they either package the loans into mortgage-backed securities (MBS) or hold them.
The lenders (Banks, credit unions) use this cash from selling to be able to sell more mortgages. This ensured that individuals could buy homes, and investors could buy apartment buildings while having a continuous supply of mortgage funds.
Qualified Mortgages and The Secondary Mortgage Markets
This enables secondary mortgage market lenders to feel more able to invest in mortgages that generally would not do so due to the high risk. Freddie Mac and Fannie Mae reduce the cost of borrowing and stabilize the mortgage market during extraordinary periods of stress on the mortgage market. Congress first started Fannie Mae in 1938 to help ensure a reliable and attainable supply of mortgage funds. Congress first charted Freddie Mac in 1970.
FAQs About Qualified Mortgages
Because QM Loans must fall under the guidelines of Fannie Mae and Freddie Mac, there are guidelines set by them that borrowers need to meet. Typical parameters of a QM Loan are: A conforming loan limit is a maximum amount that you can borrow. This loan limit is preset and varies by state and county.
For the lower 48 states, the maximum amount on a one-unit property 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.
Loan to Value Ratio
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.
Debt to Income Ratio
The Debt to Income (DTI) ratio is factored in by taking the debt you owe each month, including credit card bills, car payments, loans, and rent or mortgage vs. your income each month. Conforming loans require a DTI of below 50%.
Credit Score
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 loan will have a term of 30 years or less.
Non-QM loans aren’t eligible for purchase by Freddie Mac or Fannie Mae, nor do they come with government backing (like FHA and VA loans do). As a result, they present a greater risk and typically come with higher interest rates.
Acceptable for Non-QM loans
The average acceptable credit score for a non-QM loan is 500; however, it depends on the lender. Most lenders will want to see 580 to qualify. Most Non-QM lenders also will work with you if you have had a bankruptcy or foreclosure. Keep in mind that the longer it has been since those have occurred, the better it is.
The loan-to-value ratio is generally acceptable at 79%, which is not significantly different than a qualifying mortgage.
A borrower for a non-QM loan can’t have a debt-to-income ratio greater than 43%. Keep in mind that if you have a lower credit score but better than the required LTV or DTI score, you may still be able to qualify.
FAQs About Non-QM Loans on Lending Guidelines
Who may qualify for a non-QM Loan?
You will most likely qualify for a traditional mortgage if you have good credit, a DTI of less than 43%, and a steady income. If you fall into the pool of individuals who do not meet these requirements, you can qualify for a non-QM mortgage.
FAQs About Non-QM Loans on Eligibility Requirements
Examples of individuals who might qualify for a non-QM mortgage: Small business owners often have tax deductions that reduce the income that shows up on their tax forms or have all their money tied up in business. A retiree doesn’t necessarily have income but does have money in their bank or retirement accounts.
Non-QM Loans For Borrowers With Irregular Income
If you are a borrower who does not have a predictable income, you would have a more difficult time meeting a QM loan requirement. These people work on commissions or are self-employed. These could be gig workers, commission employees, or seasonal workers. A real estate investor who has a lot of outstanding loans but adequate income is another scenario of an individual who would need a non-QM mortgage.
A non-US citizen would not have the credit history or tax records needed to qualify for a traditional loan. The number one reason a person may only qualify for a non-QM loan is their credit. If borrowers have issues with their credit, such as bankruptcy or foreclosure, they might still qualify for a non-QM loan and be willing to pay a higher interest rate and fees.
Types of Non-QM Loans
There are numerous non-QM loans for those who will not qualify for a QM loan. Included in these are:
Non-QM Mortgage Loans For Self-Employed Borrowers
Bank Statement Loan for self-employed borrowers is one of the most popular mortgage loan programs for business people who declare little to no income on their income tax returns. A Bank Statement Loan is a loan that self-employed individuals frequently use. This is due to the high amount of tax write-offs that business owners have.
No-Income Tax Returns Non-QM Loans
Because the write-offs are applied on tax returns, these individuals would not qualify for a traditional mortgage, affecting the Debt-to-Income ratio. With a bank statement loan, you can use your bank statement to qualify and not tax returns. You will need to supply up to 24 months of bank statements and proof that you have been in business for at least two years.
Non-QM Foreign National/ITIN Mortgage Loan
Another FAQs About Non-QM loans is non-QM foreign national and ITIN mortgage loan programs for individuals new to the United States or foreign investors. If you are new to the United States, you may not have the appropriate credit and income history to get a conforming loan. With this non-QM loan, an Individual Tax Identifier Number can be used (ITIN) in place of a Social Security Number.
Non-QM Jumbo Loans
One of the FAAs about non-QM loans is whether are there such mortgage loan programs as Non-QM Jumbo Loans. A Jumbo Loan is a non-QM loan that exceeds the conforming loan limits set by the Federal Housing Finance Agency, which is why they are non-qualifying.
The FHFA sets loan limits based on your area and only allows loans up to those limits. For example, you can only borrow up to $647,200 for a single-family unit in most of the US. However, if you are buying in another high-cost area, such as Alaska, the loan limit is $970,800. Jumbo loans will require a higher down payment.
Non-QM Private Money Rehab Loans
Another popular FAQs about non-QM loans is whether are there non-QM Private Money Rehab Loans. These loans are also called Fix and Flip Loans. These loans are used to modify and rehab buildings to sell at a higher cost. These homes are typically unable to qualify for a conventional QM loan due to the needed amount and type of repairs.
FAQs About Non-QM Loans Are All Non-QM Mortgage Lenders The Same?
There are many lenders of non-QM mortgages. However, not all lending institutions offer them. Some agencies specialize in low to moderate-income buyers. State housing finance agencies, nonprofits, and community development financial institutions are exempt from some of the rules of ensuring you can repay the loan. This allows for a higher DTI or lower credit score than a qualified loan.
Loan Limit on Non-QM Loans
Small lenders with less than $2 million in assets, creating less than 500 loans annually, are exempt from conforming to the QM loan guidelines. There is no debt-to-income limit for small lenders. A mortgage lender can also offer non-QM loans. These will come with higher interest rates and higher fees. A credit union doesn’t always sell their loans, so they are more lenient on guidelines, meaning they don’t need to qualify. A loan officer will try to work with you if you are already a credit union member.
FAQs About Non-QM Loans: Types of Non-Qualified Mortgages
It is important for you to review your financial standing and goals to understand what type of Non-QM loan you will need. When it’s time to find a lender, you will need to shop around to see who offers what types of programs for your needs. You can gather information from various lenders and speak to as many loan officers as you need to. Try to find a lender who specializes in non-QM loans and assists individuals with a lower credit score.
FAQs About Non-QM Loans | What Are The Pros And Cons of Non-QM mortgages
Millions of people have worked hard to get ahead in the world but are still unable to qualify for a traditional QM-Mortgage. With a non-QM mortgage, you generally be able to have a lower credit score, higher debt to income, more flexible terms, varied forms of documentation allowed, and allows non-salaried.
Other unconventional workers to buy or refinance a home. The cons include higher costs and fees, higher interest rates, and it’s unavailable through all lenders. Because lenders are not held to the QM Mortgage standards, non-QM lenders have a much broader scope on how they process and charge borrowers.
FAQs About Non-Loans on Timeline From Application to Closing
The process for applying and closing on a Non-QM loan is similar to a qualifying loan and normally takes about the same amount of time. Ultimately, a non-QM loan is the only option for some individuals based on their finances and poor credit score. Additionally, not all property purchases are for a single fami8ly traditional home. A change in income, bankruptcy, a job loss, or foreclosures can all affect if an individual can qualify. If you fall outside of the QM loan guidelines, there are options for you!