NON-QUALIFIED MORTGAGES

The best way to understand a non-qualifying mortgage is to look at the criteria for traditional, qualifying mortgages. To qualify for a conventional mortgage, you must meet these requirements:

• Income: You must have verifiable income, including pay stubs, W-2s, and tax returns.
• Debt: Your debt-to-income ratio (DTI) must be 43% or less. This is the amount of your monthly income that goes toward your existing debts.
• Limits on fees: Points and fees on your loan cannot exceed 3% of the loan amount.
• No risky loan features: Risky features include interest-only loans (where you only pay interest without reducing the principal), negative amortization (where your principal can increase, even while you are making payments), or balloon payments (where a larger payment can be tacked on to the end of the loan).
• Loan term: The loan term must be 30 years or less.

If you can’t tick all of the above boxes, you’ll need to look into non-qualifying mortgages.

Essentially, mortgage lenders need to know you have the ability to repay your loan. The above regulations also protect buyers from risky loans. These minimum standards for qualified mortgages are part of the 2010 Consumer Protection Act and Dodd-Frank Wall Street Reform Act.

Why do these regulations exist? In the years leading up to the Great Recession, lenders seemed willing to approve mortgages for anyone with a pulse, including those with poor credit and low down payments. Some mortgages did not verify income at all. Unethical lenders would crowbar home buyers into unaffordable mortgages. This willy-nilly approach was one of the reasons the recession hit with such ferocity. Millions of people who had home loans could not afford the payments.

Today, as long as lenders follow these strict lending guidelines, they are protected from liability. Borrowers cannot come back (as many did during the Great Recession) and claim that a lender knew they could not make the monthly payments.

Non-qualified mortgages are not backed by government agencies like FHA, VA, Fannie Mae, and Freddie Mac.

Who are non-qualified mortgages for?

A non-QM is a good idea when you have the income to make regular, on-time mortgage payments but cannot get a qualifying mortgage.

Imagine that you own a contracting business. Some months, your income is high; others, only a little goes into your bank account. You cannot know precisely how much you will earn yearly. But you don’t have trouble paying your bills, your credit score is high, and you have money in the bank. Even though your finances are healthy, you cannot tick the “income verification” box required for a qualified mortgage. That’s where a non-QM comes in.

The type of borrower who might benefit from a non-QM loan includes:

• Retiree
• Self-employed
• Real estate investor
• Business owner
• Foreign national
• Buyer who lives off investments, or has high assets and low income
• Buyer with a high debt-to-income ratio
• Buyer with less-than-perfect credit

Non-QMs illustrate that mortgages are open to many types of home buyers. You can get a mortgage with bad credit, or if your income is low, or if you have a high DTI.

If you’re concerned about whether a non-QM is safe, it’s good to know that they are not the same as subprime mortgages. The Great Recession housing meltdown has led to a misconception that non-QMs are bad loans. However, like qualified mortgages, today’s non-QMs have their guidelines.

The lending process is similar, apart from the loan documents required. Both loan types are subject to the “Ability to Repay Rule.” Unless a lender goes out of its way to determine that a borrower can repay the loan, they are open to lawsuits. A non-QM is as safe as other mortgages.