For those that want to purchase a home but are worried that they can't qualify for traditional mortgages, a non-qualified mortgage is an alternative option. Traditional or qualified mortgages were rolled out in 2014 to ensure that those who took mortgages would be more likely to pay back the loan. Lenders were made to thoroughly evaluate the borrower's ability to repay the loan and borrowers had to meet stringent criteria.
A non-qualified mortgage (non-QM) is a type of home loan designed for homebuyers who cannot meet the strict set of criteria to qualify for a regular or traditional mortgage. For instance, those who are self-employed, have irregular or erratic sources of income, or don't have the required documentation to qualify for a qualified or traditional mortgage might be able to get a non-qualified mortgage. While non-QM mortgages sometimes have a bad reputation, they are a good choice for many borrowers.
The best way to understand what a non-QM is is to understand the criteria required for borrowers to meet to qualify for a traditional mortgage. To qualify for a traditional mortgage, borrowers need to meet the following requirements -
The borrower needs to have a verifiable income stream, including W-2s, tax returns, and pay stubs.
The borrower's debt-to-income ratio must be 43% or less. This ratio reflects how much of your monthly income goes towards servicing your debt.
The fees and points on the loan cannot exceed 3% of the total loan amount.
The loan tenure cannot exceed 30 years.
Risky features can include negative amortization (where the principal can increase even while the borrower is making payments), interest-only loans (where the borrower pays the interest only without the principal being reduced), or balloon payments (where larger payments can be added on at the end of the loan tenure).
Failure to meet any of the above criteria means that a candidate will not be able to obtain a traditional mortgage and might have to look at getting a non-QM one. With traditional mortgages, which are lower risk compared to non-QM ones, lenders need to be satisfied that the borrower has the capacity and the ability to repay the loan. Traditional mortgages are backed by government agencies like FHA, Fannie Mae, Freddie Mac, and VA, while non-QM mortgages are not.
The above criteria and regulations were also created to protect buyers from risky loans. Qualified mortgages have minimum standards for qualification and were introduced as part of the Dodd-Frank Wall Street Reform Act and the 2010 Consumer Protection Act. Today, as long as lenders meet the above strict lending guidelines, they are protected from liability or from claims from borrowers claiming that the lender knew they could not make their payments.
Not every mortgage lender can provide non-QM mortgages, and therefore, it may not attract everyone. However, non-QM is getting a lot of press and media space within the industry and many lenders are now trying to enter the space and compete with the lenders that are already offering non-qualified mortgages.
Since Non-QM loans are focused on borrowers with non-traditional income sources, assessing the capacity of such borrowers is a tedious process. It requires a special skill set to review bank statements and determine the borrower's income and ability to repay the loan, which lenders struggle with. This is mainly because it is difficult to source the right talent that can scrutinize the relevant documentation to determine the creditworthiness of the borrowers. Since the guidelines are decided by the respective lenders, onboarding credit underwriters is much more difficult as they need to be trained extensively before entering operations and starting production.
Team Flatworld has extensive experience with non-QM lending as we serve some of the top non-QM lenders in the country. From reviewing bank statements for pre-qualification of borrowers to processing the loan and a complete credit underwriting, our expertise extends across the length and breadth of non-QM lending. We have successfully optimized the non-QM origination process and empowered multiple lenders in their pursuit of building a successful non-QM lending division or scale-up operational capacity for an existing non-QM team.
If you are interested in partnering with us for non-QM processing support, get in touch with us now.