Conventional VS Non-QM Mortgage Loans

• ByAHL Funding Press

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conventional vs no-qm loans

A new house may be one of the most expensive investments your client will ever make. If you intend to finance the purchase, you’ll need to be clear about mortgage prospects before you start looking for the perfect opportunity for mortgage closure.

However, not all home loans are the same. So, doing your homework before making a decision will help you choose the best solution for your client while respecting their financial position and even saving them money. In addition, when you pitch, you’ll have a better chance of closing the deal.

With our experience as a leading mortgage lender, we’ll walk you through the loan process, so you know what to anticipate every step of the way. You’re not alone, AHL Funding will help you locate the loan that’s perfect for you. Because we believe that assistance does not cease when you receive the keys. We are here to help you as you grow into your new home.

Do you want to finance a property that is too pricey for a standard loan? If your potential client wants to buy a house but is concerned about their ability to qualify for a regular mortgage, a non-qualified mortgage is an option that you can propose to them. What if they are a self-employed borrower, it’s hard to get a conventional mortgage, otherwise referred to as a qualified mortgage. Should you offer non-QM loans? To answer that question, you must first understand how non-qualified mortgages operate, including the risks they pose, who qualifies for them, and how they impact mortgage rates.

Fortunately, we will go through everything, including how non-QM loans work, how they vary from QM loans, the benefits and drawbacks, and how to obtain one. In this article, we’ll explain how a non-qualified mortgage works and help you determine if one is good enough for you.

What is a Non-Qualified Mortgage?

A non-qualified mortgage (non-QM) is a type of house loan meant to assist home purchasers who do not fulfill the stringent requirements of a qualifying mortgage. If you are self-employed or do not have all of the required papers to qualify for a typical mortgage, you may need to consider non-qualified mortgages.

Looking at the requirements for traditional, qualifying mortgages is the best method to comprehend a non-qualifying mortgage. To be eligible for a typical mortgage, one must fulfill the following criteria:

  • Income: Verification is required, including pay stubs, W-2s, and tax returns.
  • Debt: You must have a debt-to-income ratio (DTI) of 43% or less. This is the portion of your monthly income that is applied to your current debts.
  • Fee caps: Your loan’s points and fees cannot exceed 3% of the loan amount.
  • No vulnerable loan features: Interest-only loans (where you simply pay interest without decreasing the amount), negative amortization (where your debt might rise even while you make payments), and balloon payments are all risky characteristics (where a larger payment can be tacked on to the end of the loan).
  • Loan length: The loan duration shall be no more than 30 years.

Qualified Mortgage vs. Non-QM

Non-QM loans are a type of loan that is not a qualifying mortgage (QM). A Non-QM loan is one that does not have to follow the federal government and the Consumer Financial Protection Bureau’s (CFPB) requirements for qualified mortgages.

Requirements for Qualified Mortgages

To create more consistent borrowing criteria, the CFPB has devised a set of standards for QM loans. These are intended to keep borrowers from engaging in loan arrangements they cannot afford to repay. These tighter laws were implemented in 2014 in reaction to the Great Recession, which lasted from 2007 to 2009 and caused many borrowers to default on their subprime mortgages, forcing them into foreclosure. This not only had a long-term impact on the economy, but it also harmed many people’s credit.

Highlights of Updated QM Requirements w.e.f. October 1st

The following are some major takeaways from the QM requirements updates:

  • Fees and points that are 3% or less of the total loan amount
  • Loan lengths of no more than 30 years
  • No negative amortization, interest-only, or balloon loans

These stringent restrictions have made qualifying for a mortgage more challenging. If your prospects do not satisfy the standards necessary to demonstrate your ability to repay, you will most likely miss out on the investment or property of your dreams.

Because many first-time borrowers are only familiar with QM loans, it may appear that investing or becoming a first-time buyer is an insurmountable task. That, however, is not the case. For many borrowers, non-QM loans are a legitimate and practical choice.

What do Non-QM Loans Entail

Non-QM loans can include a wide range of mortgages, including:

  • Home loans with durations longer than 30 years
  • Negative amortization mortgages
  • Mortgages with interest-only payments

Non-QM loans may also surpass the existing price-based thresholds set by the CFPB:

  • QM Secure Harbor APOR + 1.50% APR
  • QM Rebuttable Assumption: APR more than APOR + 1.50%, but less than 2.25%

The Common Requirements for Non-QM Mortgage

Depending on the lender, the conditions for a non-QM mortgage differ. Most mortgage lenders, in general, need the following:

  • A good credit score
  • DTI ratio of at least 50% (varies by lender)
  • Two years of self-employment evidence
  • Personal or corporate bank statements over the last 12 to 24 months (for some)
  • Business license and any other papers pertaining to your company

Who is Benefited by Non-QM Loans?

Non-QM loans are typically useful for those who have located their ideal house but have been rejected for a home loan based on qualified-mortgage criteria. A non-qualified mortgage may give a short-term lending option until you fulfill normal mortgage standards and are able to refinance to a typical loan.

Non-QM lenders provide solutions for:

Borrowers who work for themselves

Non-QM lenders may provide bank statement mortgages without the necessity for submitted tax documentation, but normal loan programs demand tax records to establish your self-employed income. To assess their qualified income, the lender examines deposits based on 12 to 24 months of personal or business statements.

Borrowers with a significant net worth

Some lenders enable you to utilize the total cash amount in an asset account divided by a time period determined by the lender as qualifying income. This is referred to as an asset depletion loan. With a typical 20-year asset depletion loan term, a $200,000 savings balance may be transformed into $833.33 of extra monthly qualifying income.

Borrowers who invest in many rental units

Non-QM loans may be a viable option for investors who have more than 10 funded investment properties, which is the maximum set by most traditional lenders. Non-QM lenders also provide debt-service coverage ratio loans to real estate investors. You don’t need extra income to qualify if the rent on your new house meets the monthly payment.

Borrowers with credit woes

One day after completing a bankruptcy or foreclosure, you may be eligible for a non-QM loan. Standard lending programs often need a two to seven-year delay following a severe credit incident.

Borrowers who are Non-US citizens

A foreign national is a citizen of another country who comes to the United States for business or leisure. Non-QM loans for foreign people may not need verification of income, credit, or a Social Security number in the United States.

Borrowers who wish to pay only their interest

Sporadic income earners may benefit from an interest-only loan, which allows them to make reduced payments at times of the year when they earn less. One caveat: After the interest-only term ends, your payment may climb, making the loan more difficult to repay.

Non-QM Loan Benefits and Risks

While non-QM mortgages are not subject to the same regulations as QM mortgages, this does not indicate that borrowers are putting themselves in an exceptionally dangerous situation. Both the buyer and the lender are protected by checks and balances.

Non-QM lending possibilities and hazards exist, as with any loan.

Perks of Non-QM Mortgages 

A non-QM loan has various benefits, including

Adaptable Requirements

To be eligible for a loan with a qualified mortgage, you must fulfill a number of criteria, including a 43% DTI ratio and a particular minimum credit score. A non-QM mortgage loan, on the other hand, does not need you to meet all of these conditions.

No Income Verification

To demonstrate your capacity to repay your loan, most mortgage lenders request evidence of income. Non-QM lenders, on the other hand, do not demand income verification to qualify for a mortgage.

Simpler Application Procedure

Non-qualified loan applications are often easier to complete than qualified mortgage applications. Furthermore, approval takes only a few days, and money is also expedited.

A Wide Pool of Loan Options

Non-QM mortgages provide a diverse range of mortgage products, such as bank statement loans, asset-based loans, investor cash flow loans, foreign national loans (ITIN), and others.

Allows for a Greater Debt-to-Income Ratio

Your capacity to pay your monthly installments is determined by your DTI ratio. Although most conventional loans demand a DTI ratio of 43% or less, you can still qualify for a non-QM mortgage with a higher DTI ratio.

Drawbacks of Non-QM Mortgages

Non-QM does have certain drawbacks, so bear them in mind while choosing it:

Increased Interest Rates

The higher interest rates on non-QM mortgages are a significant disadvantage. Non-QM lenders charge higher interest rates to mitigate the risk of lending.

High Fees and Costs

There are no restrictions on how much lenders can charge on non-QM loans because they are not guaranteed by any government program. Aside from the increased interest rates, you may also have to pay additional expenses, such as closing charges. You may also be required to pay exorbitant origination costs.

Increased Default Risk

Non-QM mortgages are interest-only loans, which raises your chances of default. Failure to make monthly mortgage payments may result in foreclosure.

Not Readily Available

Non-qualified mortgages are not available from all lenders since they are deemed risky.

Say Hello To Better Non-QM Mortgage

Do you wish to add non-QM loans to your portfolio? AHL Funding is a full-service lender that provides homeowners who do not qualify for a traditional mortgage with a variety of non-qualified mortgage options. AHL Funding, as a non-QM leader, can help you provide your clients with the following non-QM loans:

  • Bank loan statements
  • Asset- Only Home loans
  • Investor cash flow mortgage
  • Jumbo loans of up to $4 million 1099 Income Loan
  • Program for Foreign Nationals
  • Mortgage with ITIN

Whether you are a novice or seasoned real estate investor or an independent mortgage specialist, Non-QM mortgage options can help you finance your acquisition without having to go through needless hurdles. Just fill out a quick online form, and one of our specialists will walk you through the application process.
Apply here:

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