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Non-Qualified Mortgages 101
Following the biggest economic crisis of the 21st century, federal and state regulators tightened the laws around mortgage lending. In response to a crash that largely due to activities in subprime lending, the government introduced the Ability to Repay rule. In short, this rule sets strict criteria outlining who is likely to repay a mortgage successfully. Those individuals then qualify for a loan called a qualified mortgage (QM).
As you might have guessed, not everyone fits the criteria for a qualified mortgage. As the mortgage finance market and housing market slowly recovered under the more stringent lending laws, mortgage lenders and more importantly, mortgage securities investors, started to offer something known as the non-qualified mortgages (NQM), which offers credit to borrowers who couldn’t fit into the qualified mortgage box.
Who Might Need a Non-Qualified Mortgage?
Let’s say you don’t fit into the QM criteria. This could be because your debt-to-income ratio is more than 43%, have been self-employed for less than two years, or many other reasons. If the house of your dreams is still on the horizon, you might find that a non-QM loan is right for you.
A non-QM loan might be a good fit for you if you are:
- Wealthy in terms of assets, but not currently earning enough income to qualify for a conventional loan
- An individual who wants to invest in properties, either for development or rental purposes
- Self-employed and are, therefore, seen as risky by conventional lending sources
- An individual with a work visa, but no green card
How Do You Acquire a Non-Qualified Mortgage?
Before you investigate acquiring a non-qualified mortgage, it’s worth understanding how they work. In a nutshell, it’s a type of mortgage that doesn’t meet the Consumer Protection Financial Bureau’s criteria for mortgage lending. In addition to serving the situations listed above, they’re also useful if your credit score is less than stellar.
A bank may still choose to provide you with a non-qualified mortgage, but, they’ll only do so when you can compensate for not meeting the CPFB’s guidelines. For example, you might not be in full-time employment, but you have an excellent credit score and you can demonstrate your self-employed earnings are consistent.
You are free to approach a bank yourself and negotiate the terms. However, the ways in which different financial institutions and private lenders approach non-QMs vary wildly. As such, you might find that it’s easier to use a broker who understands your unique situation and can overcome hurdles for you, placing your loan with the non-QM lender with a program created for people with similar employment and income situations.
When Should You Choose NQM Over a Qualified Mortgage?
If you’re trying to invest in a property and time is of the essence, you may want to shoot for a non-QM over a QM. While policies do vary between lenders, non-QMs may have faster approval rates. Because of this, you’re less likely to miss out on your dream property while you try to meet the Ability to Repay rules that you may never satisfy based upon your employment and income situation.
Or, if you can see for yourself that you don’t meet those rules and you don’t want to waste your time, choose a non-QM loan. The benefits to doing so include fewer wasted fees, a higher chance of success, and a faster route to owning the property you want.
Should You Consider an NQM from a Private Lender?
Considering a non-QM loan from a private lender is always an option. They often provide less stringent repayment terms compared to banks, and while a good FICO score is a plus, their lending requirements are often more flexible. Opening yourself up to the private lending market increases your chances of success since private money lenders are more likely to look at your investment’s potential over your current financial standing.
If you do head down the private lending route, give some serious consideration to using a broker. With access to a bigger pool of lenders than the ones you can source yourself, they’ll increase your chances of success and create a strong case for lending to you. In addition, they can match you with a lender that is a perfect fit for your unique lending scenario. First Capital Trust Deeds has extensive experience funding non-QM loans for owner-occupied and rental property borrowers.