Non-QM Home Mortgages


 
Just because a mortgage is non-qualified does not mean it is subprime! Learn what the differences are and how non-qualified home loans allow many home buyers to get their dream home, while having a safe and solid home mortgage! One of these loans could work for you!



Are non-qualified and subprime mortgages the same thing?


The definition of Subprime Lending is "...making loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks such as unemployment, divorce, medical emergencies, etc." Wikipedia

 


The answer is no! Learn why!
 

Non-qualified mortgages are not subprime, but they do share a singularity in that they both can not be sold to "GSEs" (government-sponsored enterprises) read Fannie Mae and Freddie Mac. However, non-qualified do meet the rules regarding the Ability-to-Repay rule and subprime mortgages do not. However, the public often believes wrongly anything that is not "conventional" or "qualified", is automatically subprime. But, that is not the case, there are a lot of home mortgages that fall into the non-qualified realm that are actually NOT subprime. So what are a non-qualified mortgages? Please understand the "QM" and "Non-QM" loan categories really did not exist until after the Dodd Frank financial legislation came into existence as result of the "Great Recession" and drew a sharp line between subprime, non-qualified and qualified home loans. The public does not generally understand these distinctions and this why there is some confusion between these categories.

The rules regarding non-qualified mortgages are specific that the lender must certify that the borrower has not produced evidence that he or she does have the ability-to-repay the loan. The lender meets this requirement by having their underwriter perform due diligence in reviewing income and assets documents. The loan guidelines for non-qualified are much more liberal than for a qualified mortgage. The FICO score can be flexible, depending on the loan program's guideline, which are set by the lender. The other difference is that non-qualified loans can not be sold to either Fannie Mae or Freddie Mac, who sets the primary guidelines for the qualified loan, which they wlll buy on the secondary market. Non-qualified loans are typically held as "Portfolio Loans" by the lender, and can not be sold to either Fannie Mae or Freddie Mac. A "Conventional " non-qualified mortgage will generally carry a higher interest rate than the a "Conventional " Qualified Mortgage. This and other risk factors including credit history are reflected in the higher interest rate that non-qualified generally loans demand.

To learn more the difference go to Conventional section of this website. However, the "GSE-eligible" category mortgage meet product guidelines and are eligible for purchase, a loan guarantee or insurance by FHA, VA, a GSE or USDA are considered Qualified Mortgage regardless of the debt-to-income (DTI) income ratio. True subprime (see Hard Money Loans for specifics below and in Niche Products menue above) there is no specific income requirement or ability to repay requirement, the loan is made pretty much solely on the value and available equity in the property after the loan has been made.

 

The non-qualified mortgages fall into these basic categories and the guidelines for each will vary from lender to lender. There could be a loan in this category that will make home ownership possible for borrowers who don't qualify for a qualified mortgage!

A Standard Non-qualified Loan:

Generally the guidelines resembles a conventional loan in a lot of ways, but the FICO score requirements are generally in the 580 to 619 range, with some lenders dipping even a bit lower. These lenders are willing to make home mortgages available to borrowers who fall just below the minimum FICO requirements for the lowest "conventional" loan. There are even some lenders have a No FICO score requirement or allow a borrower without a credit history to qualify with only "alternative" credit , using utility bills, monthly insurance payments or other monthly payments that provide glimpse into the borrower's wiliness to meet their obligations. They still must show they have assets, cash reserves, work history and a income that demonstrates their ability-to-repay the loan, just like a conventional or qualified home loan. As with all non-qualified mortgages the interest rate will be higher, than it's qualified cousin, because of the additional risk the lender is assuming with these types of mortgages. Expect to have a larger down payment, again depending on the individual lender. This type of loan is held by lender and is know also as a "Portfolio Loan", because it does not meet Fannie Mae or Freddie Mac's guidelines and can not be sold to a GSE. The exception to the Ability-To-Repay rule is Hard Money Loans see below.


2018 High Cost CA Counties!

Conforming and FHA loan limits went up as Janurary 1, 2018 to $679,650.00 from $636,300.00 for High Cost Counties, also the floor as well as the ceiling has been raised by The Federal Housing Administration. The floor is $453,100 in non-high cost counties. See High Cost Counties Chart for the up dated max. loan amounts for the high cost counties. Click Here


Hard Money Loans:

These loans are not made on the borrowers credit or income and are not concerned with the "Ability-to-Pay", they often can not qualify for normal "Conforming Mortgage" and are "Non-Conforming", while still being Conventional. Then, what is this type loan based on? The property must qualify on it's own. A Hard Money lender generally will require a Loan-to-Value (LTV) to be at least 50% to 60%, and the loan term is usually short, 3 years or less and the interest rate will be very high. They look at why borrower wants the money and determine the risk of not getting paid within the term of the loan or not. Their primary consideration is if they foreclose, whether they will make a profit on the future sale. These loans are often interest only and have a balloon payment at the end of the term. This befefits the borrower, because of the lower monthly payment. The Hard Money Companies are funded by private money from individual investors, who are looking for a much higher than average return on their money. The "hard money" lender holds the mortgage in their "Portfolio" and are not concerned about selling the note. The primary point is a "high" overal all return for their investors! This is achived by consistently high rate of return, either by the interest rate charged, or from the sale of the property in case of foreclosure. They are taking a higher risk and expect a higher return. They are not under the same lending restrictions as the those lenders who want sell a mortgage on to secondary market to SEC regulated investment banks or various government agencies. There is further discussion of Hard Money, in Niche Lending Products with an example of why a borrower would like this type of loan, Hard Money Loans are classified as: Subprime, Non-Conforming and Conventional.

SIVA Loans:

Stated Income Verified Asset Loan. This non-qualified mortgage allows a borrower to state his/hers/their income and the lender must verify assets. This is usually done by providing a statement of income but verification of bank statement, brokerage statements of other type of documents that confirms the assets that are being claimed on the the loan application. This document is also known as a 1003 Mortgage Application, but borrower does not need to prove the income, which is being declared or stated. Expect this type of loan to have a higher FICO requirement usually above 700 and higher interest rate. This type of loan and other loans No Doc, or SISA are generally considered subprime, because the the lender can not demostrate an Abiity-to-Repay.

SISA Loans:

Stated Income and Stated Assets guidelines allow the borrower to state both the income and the assets. This home mortgage does not require the borrower to verify either income or assets. Like SIVA above, this type of loan requires a higher FICO Score, because the lender is basing the approval on past credit history. Expect a higher rate on all of these loans because of the additional risk.

No Doc Loans:

Under this type of loan the guideline will vary from lender to lender, but this is a home mortgage where the borrower does not verify anything accept his/hers/their citizenship. Requires a very good FICO score and excellent credit history.

Can These Loans Be Turned Down?

Well yes, if the borrower states an yearly income that does not pass the reasonable test, the loan will not be approved. Let say the borrower's stated income, as a store clerk is $455.000 year. The underwriter will ask if that income seems reasonable for the borrower's job title or job description.The underwriter will look up the salary range for the borrower's. As an example: a store clerk from their job/income reference. If is not within the "ball park" income range for store clerk's pay scale the loan will get declined. It is also possible that either the lender guidelines or the underwriter will require the borrower to fill out a IRS Form 4506, which allows the underwriter to request the borrowers last two year income tax form from the IRS. Which, will or will not confirm the borrowers stated income. The borrower's credit history and FICO must meet the individual lender guidelines for the specific loan program type.

 

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Down Payment Requirement:

Normally, a down payment is required for these types of loans, which will vary by lender, the specific loan program. The amount of the down payment depends on the guidelines for the specific program. Some lenders may require more "skin in the game" for a given borrower. Because each of these mortgage programs provide their own special risk profiles for the lender. The assumption is: "the more money down the less likely the borrower will walk away from a given type of loan". Although, not all lenders make these of loans, more and more lenders are starting to offer some variation of one or more of these mortgage programs. As I write, these loans are still permitted. There is some question if they should be given as the only contribution to the "Great Recession".

What is the Credit Requirments for this type of loan?

Although, there are no hard rules for the minimum FICO score. The general "rule-of-thumb" is the more risk the higher the FICO score requirement, and this will vary from lender to lender. You should expect 700+ FICO Score. As mentioned above for those with good income and assets, but poor or no FICO or credit history, the scores can be in the mid-to-high 500s to low 600s in the case of FHA home loans. Although this is only meant to be a brief informative description of what was commonly referred to, and many still think of as "subprime" loans. However, these mortgages should be more accurately described as a Conventionsal "Non-Qualified Mortgage". I went into more detail about true subprime, when I discuss Hard Money Lending (above), where the "Ability-To-Repay " is not the primary consideration, nor is credit history or FICO for the lender or the lender's private investors.

My take on the real estate crash and subprime's contribution to, but not the only reason for the Great Recession:

Subprime loans, which prior to the July 21, 2010, signing of Dodd Frank by President Obama, got a bad reputation during the real estate and financial crash of 2008. I would argue that it was not just subprime loans, which we now called non-qualified loans and are listed above. It was a combination of that type of loans, real estate investor 's greed, a over-extended economy, not only in real estate, but also personal credit generally. The particularly complex, little understood area mortgage derivative investing, which was marketed worldwide by wall street. I would suggest these fraudalnt, deceptive derivative products, was the major contributor in bringing the global financial markets to their knees. However, multiple factors including bad actors in the real estate industry, major Wall Street Banks, the financial Rating Companies, all contributed to the massive worldwide financial crash. It is obvious a few bad real estate loans in the USA did not bring ountries like Iceland and others countries around the world to the brink of financial destruction. It was the fact that the worldwide investment community no-longer trusted any real estate derivitive real estate products in general and their values dropped like a rock. When trust is lost in the investment community the encomy of world can not function. Although it pretty much agreed, the "Great Recession" was triggered by the collapse of a over heated U.S. housing market and the overly liberal lending guidelines. Housing prices reached a historically crazy, unsustainable level in 2006-2007. Driven by both investor greed, and the fear by many home buyers driven by the thought "if I don't buy now, I will never be able to afford a home!". Which created a buying bubble, that more often than not relied lowering of borrowing standards and on the "greater fool theory" fueled by speculation,.We just ran out of "greater fools" by beginning of 2007, and it spread throughout the economy and then the world who invested heavily in these real estate derivitves. Subprime loans would not have created the problem, if the wall street bankers had not bundled them with conventional/qualified home loans making impossible to determine the actual risk of any of these products. By not separating these various risk products into like bundle investor could determine risk or value. However they sold thedr BAD bundles as AAA loans deriritives, undermining the world financial markets. This was fraud plain and simpile.

That is not to say there isn't a lot of fault to go around. A lot of people including the GSEs, the lenders, real estate agents, the average home buyer, to the real estate speculators, to the wall street banker's and the secuity rrating companies all contributed to the bubble. The Wall Steet bankers, made the situation worst by bundling high risk subprime loans, with very well underwritten and secured home mortgages. Some of the biggest most reputable Wall Street investment houses knowingly lied to investors about the risk quality of these bundled "time bombs". Misleading unknowing investors looking for higher return from these mortgage backed derivitives. Invetment funds, pension funds, governments, banks and individuals around the world, invested in these financial instruments, apparently without knowing the actual risk of these derivitive mortgage backed securities posed. The "Wall Street" investment houses sold them as "safe investments", which were supposedly secured by AAA investment rating to investors world wide. As we all now know the bomb went off in portfolios o governments, major banks, investors, including pension funds. When the over extended real estate speculators started having problems "flipping" their recently purchase properties, they started walking way form these "investment" homes. The lenders started seeing a trend of defaults rise, and falling housing values, began tightening lending guidelines, which contributed to a further a further weaking of housing demand and of home values. The contagion spread to every housing market in the US, even Europe and China. Eventually resulting in the ecomony of entire world to contract, and go into what came to be known as "The Great Recession".

As foreclosures grew to 1.4 million homes, which represented 3.4% of all homes with a mortgage and millions more home mortgages were underwater in the United States. This contraction resulted in more people losing their jobs in construction and related industries, which resulted in non-construction jobs being lost. The stock market colapsed and that wipe even more wealth of Americans and cause more contraction. People could not sell their homes for what they still owed on the mortgage and without a job they could not make the payments, this caused more foreclosures. At the height of financial criss, the job lost grew to over 800,000 a month for many months. I would argue the people who loss the homes were not "bad" people, and they did the only logical and responsible thing they could do for their family and themselves. They just walk away from their mortgage. They did what any sensible business person does, they cut losses and even go into bankruptcy. These foreclosures were certainly not just subprime mortgages taken out by greedy people, but mainly good, honest and hard working families just trying to live the American Dream. May I suggest many and probably most of borrowers were actually well qualified convenional conforming borrowers. These were good people working hard to get ahead, before the real estate crash. They were among the millions of Americans that lost good paying jobs, which forced them into a world of hurt. Thankfully the foreclosures have slowed through the recovery. Housing, prices are reaching former levels in many locations in California. Employment is at or near full employment ( in Sept. 2016). We are putting our lives and our communities back together again, but unfortunately for to many, they are still suffering. With luck we all have learned a good lesson.

We now have financial reforms in place, that are designed to inform the public, provide more claritiy and consumer protections. There are new financial regulations on lenders, brokers, Wall Street Bankers and borrowers. All of this has provided a stability to the housing market. Now, we are seeing real estate home prices raise to pre-crash highs in many communities in California. However, this seems to be built on real demand for housing and not on speculation. We all hope these regulations will bring another 80 years of housing growth and home ownership. Bubbles happen many times in the past! Whether it was 16th century Dutch tulips or in 2007 real estate. They will again! That's My take! I would cauation those who would argue that the regulations are too strict , we found out what happens when those restrictions and controls are removed.

 

 

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