The mortgage lending world is not kind to those who fall outside established government guidelines – the ones that define so-called “qualified mortgages,” or QM loans. For those of us living and working outside the Beltway, these new rules defy logic. For example, under government guidelines, a buyer can get a loan with a 580 credit score and 3.5 percent down payment (which doesn’t even have to come from the borrower’s own funds), no savings and very little disposable income. On the other hand, a successful, self-employed applicant, with a 760 score and putting 30 percent down, often cannot get a QM loan.
The Bad News
Statistically, the second applicant is less likely to default, but most mortgage lenders prefer the first – in fact, a 2014 Fannie Mae survey found that just 19 percent of mortgage companies indicated that they were willing to pursue non-QM lending. This is because making QM loans provides lenders protection – government or private mortgage insurance covers losses if the borrower doesn’t pay, while a non-QM lender could be forced to buy back a non-performing loan.
The Good News
If you don’t happen to fit into the government’s narrow definition of an acceptable applicant, this is not great news. Fortunately, non-QM lenders are stepping up to meet the needs of folks with oddball sources of income, “just missed” credit scores, high debt-to-income ratios or other issues. These lenders are not big banks – many are local lenders, mortgage brokers or smaller institutions serving their communities. Anna Cuevas at Lendsure in San Diego, California (licensed to lend in California and Arizona) says that, “There is a pent up demand for alternative financing. It is expected to make up 10 percent of originations in the very near future rising from 50 billion to 600 billion in volume.”
Is a Non-QM Home Loan for You?
If you’re looking for home financing and having a hard time finding it, a non-QM home loan might be your best mortgage option. Non-QM loans are designed to meet the needs of borrowers with these issues:
- Debt-to-income ratios exceeding 43 percent
- Credit scores below guidelines, perhaps due to old events or factors having nothing to do with credit-worthiness
- Self-employed with little taxable income but plenty of money available to make a mortgage payment
- A short sale, foreclosure or bankruptcy in the last four years
- A very large loan amount (some non-QM lenders make loans up to $4 million)
Understand that non-QM does not mean sub-prime. Lenders have to verify that you can afford the mortgage. Even non-QM lenders must “make a reasonable, good-faith determination that the consumer is able to repay the loan,” says the Consumer Financial Protection Bureau (CFPB). However, lenders don’t necessarily have to use several years of tax returns and financial statements to do so. They might instead look at your bank statements and see how much money moves through your accounts.
Qualifying for a Non-QM Loan
Non-QM mortgages are not standard products. Every lender and its investors gets to create its own guidelines. However, most of them have a few similar rules.
- In general, you’ll need a substantial down payment or lots of home equity. The more “skin in the game” you have, the less risk to lenders. However, some programs allow just 15 percent down with no mortgage insurance.
- Most (but not all) programs require high credit scores. Higher scores mean safer loans for lenders. Some products allow scores are low as 560, however.
- Most programs allow higher debt-to-income ratios, but your disposable income must be substantial. For example, if your DTI is 50 percent and you earn $2,000 a month, you’ll have just $1,000 a month for food, utilities, taxes and incidentals. That’s risky. On the other hand, if you have a 50 percent DTI but earn $10,000 a month, you’ve got $5,000 a month for incidentals – that’s probably less chancy.
Because non-QM loans are not standard, your search may be more challenging than it would be for a Fannie Mae or FHA home loan. A knowledgeable home lending professional can help you navigate this world and find a program that meets your needs.