Recent industry reports have described the Non-Qualified Mortgage (Non-QM) as the fastest growing bank asset in America poised for even greater growth in 2018. So what exactly is a Non-Qualified Mortgage loan and how does it compare to Qualified Mortgage (QM) loans?
Brief History: As a result of the 2008 mortgage meltdown a new stricter set of guidelines was set in place by the Consumer Financial Protections Bureau (CFPB). These new rules clearly defined and strengthened borrower requirements, explained mortgage costs, lender liabilities, and created more stable loan features for both guaranteed and government backed mortgages.
These changes created what's called Qualified Mortgages or QM loans. And any mortgage that does not conform or falls outside of these guidelines is called Non-QM or Non-Qualified loans. Up until recently most bank depository institutions stayed out of the Non-QM loan market leaving it to well funded capital management companies to originate and service these loans.
So How are Non-QM Loans different from QM loans?
Non-QM Loans are able to exceed borrower Debt-to-Income ratio of 43%, have terms longer than 30 years, can carry much higher loan amounts, have higher interest rates, can originate interest-only loans, create balloon payments loans, have pre-payment penalties, have Adjustable Rates, and also can charge upfront fees that exceed 3% in addition to closing costs.
WOW that doesn't sound appealing at all. So why would anyone want a Non-QM Loan?? While on the surface a Non-QM loan may seem very unappealing many borrowers have found tremendous value and numerous advantages from these often creative, flexible and wide ranging products that they cannot find from traditional banking institutions.
There are (3) large and very different segments that are currently taking advantage of Non-QM Loans.
1. [Sub-Prime Borrowers]: Individuals with poor credit seeking to buy a home.
2. [Investment Grade Borrowers]: Real Estate investors looking to Fix-N-Flip, Fix-N-Rent or buy Commercial property.
3. [Jumbo/Asset Grade Borrowers]: High credit, High Income, High Net worth or Self-Employed individuals with much more complex financial portfolios who desire to purchase luxury, investment or commercial properties.
1. For credit challenged individuals who may have sizeable liquid assets (i.e. cash, investment or 401k accounts) they're able to qualify for a mortgage despite low FICO scores. However, they’re subjected to excessive upfront lender fees that can exceed 3% often ranging to 5% for certain high-risk loans. In addition, these borrowers are also required to provide large down payments ranging from 10-20% and are then charged a higher interest rate on the loaned amount. So, if you have bad credit, really want the house and you also have some cash, then there are Non-QM loans and lenders just for you!
2. For a Real Estate Investor looking to Fix-N-Flip houses, Fix-N-Rent property or buy Commercial property a Non-QM loan can make this happen quickly! Approval is based upon the ARV (After-Repair-Value) of the property you're looking to Flip or the anticipated Rental Income from properties you're looking to rent out. There's no calculation of personal DTI (Debt-to-Income), no analysis of personal income and in many cases there isn’t even a submission of tax returns. Further, borrowers can purchase property in a business name thus limiting their personal liability. READ more on Fix-N-Flip, Fix-N-Rent and Commercial Non-QM loans.
3. For high credit, high income, high net worth or self-employed individuals, Non-QM loans works best if they’re looking to buy a luxury, investment or commercial property and need a loan reaching into the millions or perhaps a business owner looking to buy property through their business name for tax purposes. All these scenarios may vary but in general these type individuals are able to leverage their existing assets with only a minimum 10% down payment and also are able to command competitive interest rates in the process.