A vast majority of home loans are considered Qualified Mortgage (QM) loans, which comply with strict regulations set forth by the Consumer Financial Protection Bureau (CFPB) and come with liability protection if the borrower is unable to keep up with payments. These are preferred by most lenders because they generally provide much less risk.
However, there are also what we consider Non-Qualified Mortgage (Non-QM) loans that don’t necessarily conform to CFPB standards. On paper, these mortgages come with more risk to the lending institutions because they are designed to help borrowers who may have “less than ideal” credit situations. It’s important to know that just because these mortgages are different, it doesn’t mean they are all bad news.
The Evolution of Non-QM Loans
Prior to the Great Recession of 2008, lenders were giving out subprime mortgages (a form of Non-QM loans) like candy at Halloween. The market was red hot and nobody expected the housing bubble to burst as hard as it did. Ultimately, too many of these loans were approved for borrowers who couldn’t really afford them. It really crippled the economy when so many of these questionable loans defaulted and the bottom fell out of the real estate market.
In recent years, we’ve seen different forms of Non-QM loans making a comeback in relation to the recovering. It is important to note that today’s Non-QM loans are very different than the subprime mortgages that sank us last decade. Though they may not still conform to all CFPB standards, they are still more strictly regulated and lenders are much more careful with their investments. Some may still require high FICO scores and borrowers must still be able to prove they can afford their mortgage payments. Lenders know what can happen because of the 2008 meltdown, so they are not going to give out these loans carelessly.
Advantages of Non-QM Loans
From a borrower’s perspective, there is great appeal to looking at Non-QM options, especially if your credit situation doesn’t allow you to qualify for a traditional Qualified Mortgage. Some of the advantages include:
1. Interest-Only Loan Options – Some Non-QM home loans have interest-only payment options for the early years of the loan that may allow someone with a limited income and/or poor credit rating to afford to buy a house without putting as much toward the principal value right away.
2. Lower Debt-to-Income Minimums – Debt-to-Income (DTI) refers to the amount of a borrower’s income in relation to existing debts and projected homeownership expenses. It is measured by a lender to see if someone can afford a mortgage loan. Some Non-QM loans allow a DTI ratio above 43%, which allows more potential borrowers to qualify.
3. More Borrowers Can Qualify – Non-Qualified Mortgage loans definitely make it possible for more borrowers to qualify for home loans. Lenders still have to protect themselves and many important financial factors will be taken into consideration before approving a loan, but Non-QM loans do open up more options for people with poor credit or lower-income situations. For example:
• Someone with a high DTI ratio
• Someone with a blemish on their credit score due to unforeseen circumstances
• Someone who has been self-employed for less than two years
• Someone with low income reported on tax returns
Non-QM Loan Options at Transparent Mortgage
To learn more about all of your mortgage loan options or to see if you pre-qualify for a Non-QM loan, call Transparent Mortgage today at (619) 888-3606 for help making the right decisions when buying a home or refinancing your current mortgage.