Sometimes, the life of your borrower simply doesn’t fit into the conventional criteria of a qualifying, agency mortgage. Whether you’re an individual or an institution, as a Mortgage Loan Originator, you’ll need to be familiar with Non-Qualified Mortgage Loans (aka Non-QM loans) so that you can negotiate successfully with lenders for these types of home-buyers.
Borrowers will occasionally struggle with finding a work frame suitable for their specific needs. This is when Non-QM loans come into play!
The Consumer Financial Protection Bureau (CFPB) is the organization responsible for identifying qualified home loans that adhere to federal government standards. Where individuals and corporate borrowers find their circumstances do not fall under the CFPB’s conditions, they are offered the opportunity to qualify for a non-conventional loan.
Specifically, Non-QM loans offer investors the opportunity to repay their loans under alternative channels, including cash flow generated from personal and business accounts.
Like all entrepreneurial endeavors, real estate transactions entail some level of risk, as with any investment. In the words of Benjamin Graham though, successful investing is about managing risk rather than avoiding it!
Both the loan originator and lender are responsible for supporting loan seekers to find a framework that best suits them. Being knowledgeable about Non-QM loan options can empower you to best assist any future homeowner to find their ideal loan and mortgage.
Who Can Benefit from Non-Qualifying loans (and Why More Borrowers May Need Them)
As the financial landscape continues to be shaped by unprecedented fluctuations, NQ-lending is expected to reach $200 – $300 billion per annum in the coming years.
This is because more and more individuals and businesses find themselves falling under one or more of the following:
- Self-employed borrowers and investors with significant income tax write-offs
As nuanced a group this might be, the people and entities who fall under this umbrella all share a key element: they do not qualify for agency and government support. Those who do might find themselves jumping through increasingly sophisticated hoops, to the point of abandoning the project altogether. Instead of forcing their way into the conventional agency buck, such borrowers can rely on Non-QM lending.
- Borrowers who do not meet the required credit score for a conventional loan
The contemporary business landscape sees entrepreneurs adopting flexible approaches to running their organizations. As a result, borrowers might not always have a trackable credit score that allows them to meet the requirement for a conventional loan. A good example would be a borrower with a debt-to-income ratio higher than 43%. Non-QM loan providers can help by focusing on the borrower’s ability to repay (ATR). This is a more forgiving, broader approach that takes into account all cash flow happening across different channels – from personal to business accounts & other investments.
- Borrowers with non-conventional income
Borrowers whose tax returns do not qualify as proof of income will find it harder to be granted a loan under traditional avenues. This is often the case for individuals living off non-conventional income including but not limited to property investment. Non-QM lending institutions are more likely to accept bank statements as proof of the borrower’s ATR.
With the US Federal Government recently expressing concern with the current inflation rate (inevitably leading to stricter qualification criteria), more professionals are likely to fall under one of these categories in the near future.
What Are The Risks Involved with NQ-lending?
Loan and mortgage professionals who have only recently been exposed to NQ-lending practices might find themselves wondering about the safety of this investment.
Whilst navigating uncharted territory, it is often too easy to mistakenly bundle up non-traditional lending methods with subprime mortgages – loans that are generally issued to borrowers with low credit scores.
By their very nature, subprime mortgages are poor-quality loans taking a risk on individuals and businesses with a low ATR. As lending money to someone with blemished credit represents a bigger risk to the lender, these are often issued at much higher interest rates and closing costs.
Luckily, NQ-lending has little to do with subprime mortgages. In fact, we could go as far as saying it is not significantly riskier than its conventional counterpart.
In spite of offering more inclusive and flexible eligibility requirements, NQ-loans follow similar processes to traditional ones. This, in essence, makes non-conventional loans not too different from more widespread styles of investment!
Nonetheless, it is still worth mentioning that, when helping borrowers explore their Non-QM loan options, it is still important to make them aware of the possibility of slightly higher interest rates.
The Bottom Line
Diversification and flexibility are becoming increasingly top-rated buzzwords in the home-borrowing space, and as a result, loan and mortgage professionals are bound to deal with more borrowers with non-conventional or potentially inconsistent income streams.
Due to recent instabilities with inflation, homebuyers interested in borrowing to buy will seek the support of mortgage experts to increase their chances of success. Being aware of the risks and benefits involved with taking a Non-QM-loan can bring your clients closer to their objectives.
At ReadyPrice, we specialize in delivering mortgage technology focusing on the needs of mortgage loan originators and loan professionals. Through intelligent automation, our platform helps MLOs take control of their workflow and communication with lenders.
If you would like to schedule a meeting to discuss your client’s Non-QM and NQ-loan needs, contact us for a free consultation today!