non qualified loan-

Non Qualified Loan

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Non-Qualified Mortgage Loan Guide forResidential Property Buyers and Owners

There are two types of mortgages: qualified andnon-qualified. The difference is whether or not thegovernment agencies protect the lender against anytype of lawsuit against them should a borrowerbecome unable to afford their mortgage paymentsand want to sue.



What is a Qualified Mortgage?

A “qualified” mortgage (QM) means that theborrower meets certain requirements pertaining tohis ability to afford the loan at the time ofapplication. In this case, the lender would beprotected against any penalties regarding this loanshould the borrower default.



What is a Non-Qualified Loan?

A “non-qualified” loan (non-QM), on the other hand,means that the borrower does not meet the“qualified mortgage” guidelines and poses a higherrisk in terms of default. Basically, these borrowersare those that do not fit into the conforming model,yet still have the credentials to obtain a mortgagefrom lenders willing to provide them. These loansare available, yet the protection against being suedby the borrower is not provided.



Qualified Mortgage RulesUnderstanding what makes a qualified mortgage willhelp you determine if you fall into the non-qualifiedloan category. The requirements are as follows:

Debt ratio cannot exceed 43% no matter thetype of loan (FHA, VA, conventional)Points and/or fees should not exceed 3% of theloan amountThe loan cannot be interest only, have negativeamortization, or any other risky featuresVerification of income is required (no statedincome or asset verification only)Loan term must not exceed 30 years



If you do not meet all of these requirements, youdo not fall under the QM rules. This does notmean you are automatically unable to get a loanor that you are destined to have a high interestrate and/or fees – it means you will have to go tolender that offers a non-qualified loan.



Going BeyondQualified Mortgage

Guidelines



The Qualified Mortgage guidelines make it difficultfor certain borrowers to obtain a loan. Whether youhave a credit score on the lower end of the spectrumand the lender needs to charge higher fees in orderto make up for the risk or you cannot verify yourincome because you are self-employed, but haveplenty of assets to afford the loan or your debt ratiois higher than 43%, you may still qualify for a loan,but be outside the QM guidelines. These are QMloans that are being offered by some lenders.Immediately following the housing crisis, loans forborrowers in any of these predicaments was hard tofind, but they are more readily available today by avariety of lenders.



Lenders basically look for compensating factorswhen accepting loans outside of the realm of the QMguidelines. For example, if you have a debt ratio thatexceeds 43%, yet you have 24 months of reservesand a high credit score, you will likely qualify for aloan, but won’t fall under the QM protection. Certainlenders are willing to take that risk as you do notpose the same level of risk as someone that has alow credit score and very few reserves. This type ofborrower would be a higher risk, require a higherinterest rate and/or fees and be very likely to defaulton their loan.



Non-Qualified Does not MeanNot Able to Pay

What needs to be stressed here is that a non-qualified loan does not mean you cannot repay theloan. The lender is still going to do due diligence inevaluating your financial situation. They will notprovide loans to borrowers that do not demonstratethe ability to repay the loan. The Ability to RepayRule, put into place by the Dodd-Frank Act, requireslenders to ensure that borrowers can afford the loan.This means:



Verifying income and/or assets

Verifying employment

Accurately calculating the debt to income

ratio

Evaluating credit history



Lenders are able to charge higher interest ratesand/or fees for loans that pose a slightly higher riskthan a Qualified Mortgage would allow, yet theymust make sure the payment is affordable. Whatthis means is the days of stated income and statedasset loans are gone. Lenders need solid proof thatthe borrower can afford the loan with slightly higherrates and/or fees with ease. They are not supposedto put borrowers in a difficult financial situation.



The non-qualified loan is a great option for

borrowers in unique circumstances including:

Self-employed for less than 2 years

Self-employed and not showing a great amount

of income on tax returns

High debt ratio yet plenty of reserves to make

up for the debt ratio

Blemished credit due to unforeseen

circumstances during the downfall of the

economy



The non-QM loans are not meant to rip borrowersoff or provide them with a loan without the abilityto confirm its affordability. They are meant to bean option for borrowers that do not fit theconforming or even FHA/VA mold as manyborrowers do not fit it now. Non-QM did notnecessarily take the place of subprime loans; itsimply gives lenders options for borrowers thatobviously qualify for a mortgage yet are notconsidered a good risk according to Fannie Mae orFreddie Mac.



Many lenders offer non-QM loans today, but theyare not all created equal. It pays to shop aroundand see what each lender offers for your exactcircumstances. If you have leverage, such as manymonths of reserves on hand, you have morebargaining power than a borrower with mediocrecredit, a high debt ratio, and very few reserves.Use your compensating factors to your advantagein order to obtain the lowest rates and/or fees foryour mortgage.



T O L E A R N M O R ENONQUALIFIEDLOAN.COM

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C L I C K H E R E



Justin McHood is Americas MortgageCommentator and has been providing

Mortgage commentary for over 10 years.

INFORMATION PROVIDED BY:Justin McHood

Mortgage Commentator


http://mortgagecommentator.com/

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