Not every borrower fits the definition of “perfect” in the eyes of a mortgage lender.
That’s not always a bad thing — maybe they need a jumbo loan due to high housing costs in their area, maybe they are self-employed, or maybe their income comes from a number of different sources. Not a bad risk, just different.
Whatever the case, non-qualified mortgages (non-QMs) are making mortgage loans possible for more people, no matter what their circumstances, and they are on the rise.
According to Altisource Portfolio Solutions S.A., non-QM loans (not including jumbo loans) are ranked as the second most promising market opportunity in the loan origination industry. Even more, Altisource predicts that the market for these mortgages will rise by 400 percent in 2019.
So, what are non-QMs, are they risky, and why are lenders and borrowers buying in?
A Non-Qualified Mortgage is any home loan that doesn’t comply with the Consumer Financial Protection Bureau’s existing rules on Qualified Mortgages (QM). Qualified Mortgages grew out of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law by President Barack Obama in 2010 after the Great Recession in order to prevent lenders from taking advantage of consumers. The requirements for Qualified Mortgages act as safeguards to ensure borrower affordability, protecting both the borrower and the lender.
Non-qualified mortgages, on the other hand, have less stringent requirements, extending the opportunity for a mortgage loan to more borrowers in a variety of different ways. For example, the amortization period for a non-QM loan can be extended over 40 years, instead of the standard 30. This helps to lower a borrower’s payments, allowing them to qualify for a loan that they might not otherwise.
Another example is the interest-only loan option. These help borrowers with poor credit scores to get into a mortgage and a house while repairing their credit scores, eventually making them eligible for a qualified mortgage.
Although non-QM loans have looser requirements, they tend to carry interest rates that are 1.25% or higher than Qualified Mortgages.
Why is the non-QM market growing?
Qualified Mortgages have a lot of requirements for borrowers— a solid credit score, a reasonable amount of debt, and tax returns that show a steady stream of income, to name a few. Many people, however, don’t meet all of these requirements because of extenuating circumstances or otherwise. This leaves a lot of potential homeowners out of the housing market.
Non-QMs are a way around financial requirements that might otherwise serve as a roadblock. In most cases, borrowers who do not meet each of the requirements for a Qualified Mortgage turn to non-QM loans as an alternative. These borrowers typically have one of the following: a high debt-to-income (DTI) ratio, an issue with their FICO score, have been self-employed for less than two years, or show a low income on their tax returns.
According to housing information company CoreLogic, the three main reasons why non-QM loans that originated in 2018 failed to fit in the QM box were (1) use of limited or alternative documentation (44%), (2) DTI ratio above 43 percent and (3) interest-only loans (13%). In other words, there is a need in the market for more flexible loan terms.
Are non-QMs risky?
From a lender’s perspective, a non-QM loan is not necessarily a high-risk loan.
First, the borrower still needs to satisfy the Consumer Financial Protection Bureau’s ATR (Ability to Repay) requirements, which every housing loan made today is subject to. Also, underwriting is much more thorough than with the sub-prime mortgages that led to the housing crisis. And, non-QMs still have stringent income verification and debt-to-income ratio threshold requirements. Lastly, risk factors including negative amortization are no longer allowed.
So, although second choice to qualified mortgages, non-QMs nonetheless have protections built in to prevent another housing crisis.
The fact is, non-QM loans are a useful financial tool for many. And, they come with financial protections and assurances that make them relatively safe. As they become more popular, they will open the door to home ownership for borrowers previously left out of the market, and that will be good for lenders and borrowers alike.
The LoanNEX Qualifier™ is a revolutionary platform designed specifically for non-traditional borrower requests. From point of sale discovery tools to lock delivery, LoanNEX provides the extra support needed for these expanded programs. LoanNEX is helping organizations big and small build confidence around Non-QM programs. Learn more at LoanNEX.com.