What are Non-QM Loans?

Conventional Mortgage Guidelines for Collections
Conventional Mortgage Guidelines for Collections & Charge offs
May 25, 2018
FHA Guidelines
Guidelines For FHA Home Loan With 3,5% Down-Payment
June 14, 2018
What are non qm loans

There was a time when most mortgage borrowers could not qualify for a home loan because of stringent lending requirements on conventional and government loan programs. So, they chose bank statement mortgage programs and non-QM loans. But, after the mortgage and credit meltdown of 2008, non-QM loans were shut down. The good news for mortgage borrowers is that the non-QM loans and bank statement mortgages are now back.

Mortgage Industry Has Changed

After the financial, credit and real estate meltdown of 2008, new mortgage regulations and rules were implemented. The congress created the SAFE ACT where all mortgage loan originators are required to pass through state and federal testing, state and federal investigations. The NMLS (Nationwide Mortgage Licensing System) was also launched in order to centralize loan officers and mortgage companies in the country. Never has any industry in the United States gone through such changes like those experienced by the mortgage industry.

Many mortgage lenders like Countrywide Loans went out of business. In 2010, the Dodd-Frank Mortgage act was drafted. Mortgage rules were created and exercised upon mortgage loan originators. Every mortgage loan originator is required to pass through credit checks where they must explain derogatory items on their credit report including foreclosures, collection accounts and bankruptcies. If mortgage loan originators have bad credit, mortgage regulators can deny them of their license.

Understanding QM Loans

Qualified mortgage provides protection to lenders from liability from borrowers when they originate QM loans. In qualified mortgage, the mortgage lender qualifies the ability of a borrower to successfully repay their loan. QM mortgage requires lender to qualify the borrower’s liabilities, income and monthly debt payments. Qualified mortgage also require mortgage lenders to not charge mortgage borrowers more than 3 percent in points and total fees.

Qualified mortgage requires mortgage lenders to refrain from issuing overpriced or riskier mortgage loans. For example, QM mortgage mandates that mortgage lenders don’t issue loan programs that have balloon payments, pre-payment penalties, extended interest only loans and negative amortization loans. The Safe Harbor Act offers protection to mortgage lenders against borrowers. Lenders are protected by qualified mortgage against mortgage borrowers who claim that they are capable of making their loan payments.

The very reason for creating new qualified mortgage guidelines and rules was to protect mortgage lenders and borrowers against risky mortgages that caused the real estate meltdown in 2008. Mortgage lenders who follow the rules of qualified mortgage can package and resell their loans in the secondary market to Freddie Mac and Fannie Mae to fund more loans. Qualified mortgage plays an important role in originating and funding loans that are risky. Also, qualified mortgage minimizes the chance of mortgage going bad or turning into foreclosure. The United States cannot afford another mortgage and real estate meltdown; therefore, qualified mortgage are here to ensure that such an incident does not happen again.

But, you don’t have to worry as there are non-qualified mortgage loans available that have lenient requirements and you can qualify for them more easily.

A Second Chance for Home Buyers

Home buyers or owners who suffered financial crisis due to 2008 real estate meltdown and who filed bankruptcy or suffered foreclosure now get another chance to become homeowners. Mortgage lenders understand that the real estate collapse of 2008 badly affected the American people and many folks had their credit ruined. After 2008’s real estate collapse, foreclosures and bankruptcy rates in the country increased and hit a record high.

Before 2008, there weren’t many people who had a foreclosure or bankruptcy. Now there are tens of thousands out there who have gone through a foreclosure, bankruptcy, short sale or deed in lieu of foreclosure. Freddie Mac, Fannie Mae, VA, HUD all fully understand the situation of home buyers and know that they have suffered from financial issues. Therefore, they have implemented mortgage guidelines with non-qualified mortgage loans that can make it easy for those who have gone through a bankruptcy or foreclosure to qualify for a loan.

Non QM Loans

All the loans that don’t fall into the QM loan category are classified as non-qualified mortgage loans or non-QM loans. Some people think that non-qualified mortgages are riskier, but that is not the case. Non-QM loans are just different than qualified mortgage because their lending requirements are not as tough. The fees and mortgage rates for non-qualified mortgage lenders are slightly higher than qualified mortgage lenders. This is because the protection that qualified mortgage loans offer is not available to non-qualified mortgage lenders. Also, because non-qualified lenders cannot sell their loans to Freddie Mac and Fannie Mae in the open secondary market and they must be sold to other private investors.

Non Qualified Mortgage Borrowers

If you experience bankruptcy and foreclosure, then you will have to wait for a certain period to qualify for a mortgage via qualified mortgage loan. There is a minimum waiting period requirement after bankruptcy, short sale and foreclosure for qualified mortgage loan, but that is not the case with non-qualified mortgage loan. If you are unable to meet the minimum waiting period requirement after bankruptcy, short sale and foreclosure, you cannot qualify with a qualified mortgage loan, but you can qualify with a non-qualified mortgage loan. For non-qualified mortgage loans, there is no minimum waiting period after a foreclosure or bankruptcy. Non-qualified mortgage loans can help home buyers qualify for a mortgage even after they suffer a bankruptcy or foreclosure. With non-qualified mortgage loans; no credit, bad credit, foreclosure, bankruptcy, deed in lieu of foreclosure, history of bad payments, and outstanding collection accounts aren’t an issue to qualify for a home loan. One important thing that is required with non-QM loan is timely payment history of last 12 months. Lenders will need to see this in order to qualify you for a loan.

Charge off accounts and old collections with credit balance don’t have to be paid off by mortgage borrowers. Medical collections are not included in debt-to-income ratio calculations. Medical collections are treated differently by mortgage lenders. As long as you have documented income and IRS can verify it, you can again become a homeowner via non-qualified mortgage loan.

Qualified Mortgage Rules with Conventional Loans and FHA Home loans

For an FHA loan, a waiting period of three years is required by the FHA after the date of foreclosure and deed in lieu of foreclosure and there is also a three year waiting period after the finalized date of short sale.

After discharge from Chapter 7 Bankruptcy, borrowers must wait for a period of 2 years in order to qualify for VA home loans or FHA home loans. After discharge from Chapter 7 Bankruptcy, borrowers must wait for 4 years in order to qualify for conventional loans like Freddie Mac and Fannie Mae. U.S Department of Veteran Affairs (VA) also requires a waiting period of two years after deed in lieu of foreclosure, foreclosure and short sale in order for mortgage borrowers to qualify for a VA home loan.

A minimum waiting period of 4 years is required by the Freddie Mac and Fannie Mae from the date of short sale or date of deed in lieu of foreclosure to qualify for conventional loans. In order to qualify for conventional loans, borrowers who have had a foreclosure must wait for a period of seven years from the date of foreclosure.

Many home buyers in America have recovered from foreclosures and bankruptcies and now their financial situation is stable. But, they are still unable to qualify for a home loan. The reason: waiting period requirements that come with qualified mortgage. The great news for these people is that they can qualify for a FHA loans, conventional loans and VA home loans with non-QM loans as there is no waiting period with non-qualified mortgage loans after bankruptcy, foreclosure, deed in lieu of foreclosure and short sale.

Non-QM Loan Requirements

In order to qualify for a mortgage with a non-QM loan, 640 credit score is required with 20 percent down payment. If your credit score is 660, you can qualify for a mortgage with 15 percent down payment. If it is 680, then you can qualify for a loan with 10 percent down payment. The debt to income ratio is 43 percent but it can go up to 50 percent. If you fail to meet these minimum requirements of non-QM loans, you cannot qualify for a mortgage after foreclosure or bankruptcy.

Non Qualified Mortgage Loans for Investment Property

Non qualified mortgage loans aren’t just for owner occupied residential property. If you cannot qualify for a mortgage for investment property with qualified mortgage loan, then you have the option to qualify with non-qualified mortgage loans. There are mortgage lenders out there who offer bank statement loans, no tax return loans and asset based loans through non-qualified mortgage loans and you can use these programs for investment property.

Bank Statement Mortgage Loans

After the real estate crisis of 2008, state income loans and no doc loan became extinct which caused self employed borrowers several problems and made it difficult for them to qualify for a mortgage. But, self employed borrowers don’t have to worry anymore as the bank statement loans are back to help them qualify for a mortgage. There are four options available in bank statement mortgage programs.

24 Month Bank Statement Mortgage

With 24 month bank statement mortgage program, borrowers are required to provide bank statements (business or personal) of the most recent last 24 months.

12 Month Bank Statement Mortgage

For 12 month bank statement mortgage programs, self-employed borrowers must provide their personal bank statement of the most recent 12 months that show deposits from work. Business account statements can also be used, but borrowers must provide business account statements of last 24 months.

1 or 6-Month Program

In one or six-month bank statement program, only personal bank statements can be used. The credit score of the borrower should be 720 or more. The interest rate is also higher with one and six-month bank statement programs because the self-employed is providing less documentation.

Minimum Credit Score Requirement

For bank statement mortgage, 680 or higher credit score is required. Mortgage lenders will accept credit score between 620 and 679 but at higher interest rate and lower loan-to-value ratio (LTV).

Non Qualified Mortgages Are Not Going Anywhere

If qualified mortgage makes it hard for you to qualify for loans, then you should try non-qualified mortgages. Non-qualified mortgages have made it easy for home buyers to qualify for a loan and are becoming more and more popular. These mortgages are the best option for those people who gone through a housing event like bankruptcy, foreclosure, deed in lieu of foreclosure or short sales as there in no waiting period with non-QM loan after an housing event. Borrowers can qualify for a home loan via non-QM mortgage right after they get out of foreclosure. With non-QM mortgage a down payment of 10 to 20 percent is required depending on the credit score of the borrower. If the credit score is high, less down payment is required, and if it is low, then more down payment is required. For self-employed borrowers, the bank statement mortgages are now available. Self-employed borrowers are mostly unable to qualify for conventional loans because tax returns are required for these mortgages and since self-employed borrowers write off many expenses in their returns, their income isn’t sufficient to qualify them for a mortgage. With bank statement mortgage, self-employed borrowers can qualify for a mortgage by providing their bank statements.

If you have been denied a home loan or have any questions about real estate or mortgage please contact the author, Matt Herbolich, MBA, JD, LLM by phone or text at 786.390.9499 or by email at mherbolich@usa-mortgage.com. Mr Herbolich works when you work, so feel free to contact him any time.

Matthew Herbolich
Matthew Herbolich
Mr. Herbolich is a Senior Loan Officer at USA Mortgage, a division of DAS Acquisition Company, LLC NMLS 227262. He is an expert not only in lending but multiple facets of real estate, particularly the title industry. Matt Herbolich trains his fellow loan officers on title industry topics, real estate investing, and countless mortgage guidelines. Have any questions? Call at 888-900-1020 or send email to: mherbolich@usa-mortgage.com

Leave a Reply

Your email address will not be published. Required fields are marked *