The mortgage market is undergoing a massive shift as of Mid 2022. Mortgage rates across all types of home loans have increased considerably. In some cases, such as the case for conventional agency loans, rates have more than doubled in less than a year. These events are now preventing millions of buyers from qualifying for a home loan.
Mortgage lenders and REALTORs are having to cope with a new economy, a new market. It is time to think outside the box in order to stay in business.
There are two sectors of mortgage lending that are poised for tremendous growth: Non-Qualified Loans and Non-Prime loans.
Non-QM and Non-Prime lending is taking off in many areas and helping out a demographic of home buyers that would not fit in the traditional Agency and Government lending boxes.
What is Non-QM Lending?
A Non-QM mortgage loan is a type of loan that does not conform to the Consumer Protection Finance Board’s definition of a “Qualified Mortgage” (QM Mortgage).
Any loan that does not meet the CFPB’s Ability To Repay (ATR) Rules is considered a Non-QM Loan. The Ability To Repay test is usually met by the lender when they require the borrower to provide the traditional income verification requirements of Qualified Loans. These documents typically include two years of tax returns, W2s and Paystubs.
There are millions of borrowers who are unable to meet the documentation requirements, yet have the ability to repay the loan. They just can’t furnish documentation to prove they can. This is where Non-QM comes to the rescue with various alternatives to qualify for a loan.
Types of Non-QM Loans
There are several types of loans that buyers can qualify for without having to provide the traditional income documentation to meet the Ability To Repay rule in the traditional sense.
Bank Statement Loans
Borrowers who can provide evidence of cash flow through their bank accounts can qualify for loans. There are options to provide 12 months or 24 months bank statements showing there are enough qualified deposits to support the new loan payment. The difference between 12 and 24 months will impact the rate the borrower gets.
Borrowers can provide personal or business bank statements. Lenders’ guidelines vary on how much of cash flow shown in the business bank statements will be used as income. Most lenders will use 50% of the business account deposits as qualified income for the loan. Some lenders allow the borrower to prove their business profit margin is higher than 50%. This allows the lender to give the borrower a higher percentage of the deposit amounts towards qualifying income.
Profit and Loss Statement Loans
Some loan programs allow the borrower to qualify based on simply a properly prepared profit and loss (P&L) statement. The P&L usually has to be prepared or certified by a qualified tax professional.
By only providing a P&L the borrower can avoid the scrutiny of tax return which may reveal write-offs that may lower their income for qualifying.
Borrowers can also qualify using assets to support their ability to repay a loan. Borrowers who have a large portfolio of stocks or a significant retirement account are great candidates for these programs.
A typical calculation for income to be used for qualifying for an asset-based loan is taking the total amount of the assets and dividing it by 60. That would yield the monthly amount a lender would use for income.
Debt Service Coverage Ratio (DSCR) Loans
This is a great option for investors looking to purchase or refinance an investment property. The lender will calculate the new mortgage payment and compare that to the property’s rental income. If the debt to income ratio is 1 percent or above, the lender will not require any additional income documentation.
What are Non-Prime Loans?
Borrowers with negative credit histories make up a good portion of our population. They want to purchase or refinance a home. Non-Prime loans are the ideal solution for this type of borrower.
In addition to applicants with negative credit history, Non-Prime lending serves other home-buying purposes such as Foreign Nationals and the purchase or refinance of vacant homes.
Types of Non-Prime Loans
The bulk of non-prime loans is made to borrowers with less than perfect credit history. Other types of loans are made to Foreign Nationals who may or may not reside in the United States but wish to buy a property here.
Foreclosure Bailouts or “D” Credit Loans
For homeowners who have fallen behind on their mortgage payments, there are very few options. The traditional agency programs will not help them refinance.
A foreclosure bailout loan will absolutely allow a borrower to refinance their house and take out enough cash from the new loan to pay off the current loan including any arrearages. This can save someone from losing their home altogether and give them a fresh start.
These loans of course carry higher interest rates and are meant as short-term financing. This allows the borrower to rebuild their credit over a period of time and then qualify for standard financing at a lower rate at a later time.
Bridge loans can serve a variety of purposes. A common use is when someone wants to buy a home and needs to sell at the same time. In today’s market, sellers are not accepting offers contingent on the sale of the existing home. There are simply too many buyers without the contingency. The solution then is for the seller to get a bridge loan on the existing home to pay for the new home in cash or with a large downpayment to qualify for the new loan.
Another purpose for bridge loans is for borrowers who may also not be able to document their income AND have negative credit. If they are looking to buy or refinance a house, a bridge loan can help them execute the transaction as a short-term solution.
Bridge financing is typically a short-term solution to an immediate need. Rates and terms on these loans are not the most favorable so borrowers don’t keep them for long. Bridge loans are usually refinanced in 12-24 months.
Foreign National Loans
Individuals who wish to purchase a home in the United States and live abroad or have entered the US recently are not able to easily secure prime loans for their purchase. Thanks to alternative lenders, these borrowers now have options to buy a house.
The typical borrower of this type of loan is a person who actually resides in a foreign country and has some ties to the US. These buyers are typically business people who may even have businesses in America.
While traditional lenders require borrowers to be US citizens or permanent resident aliens, non-prime foreign national loans do not require that. This opens up a lot of doors for individuals to be able to invest their money in one of the most secure investments in the planet; US Real Estate.
This type of market is growing by leaps and bounds in many areas of our country. People from other countries have realized the strong upside of investing in the US. They see the large appreciation homes have experienced over the past decade. It makes a lot of sense for them to partake in the financial upside.
The Bottom Line
Non-QM and Non-Prime lending fill a very real and present need in the real estate market. The sector is growing rapidly and lenders are coming in to fill the gap.
Some of the top Non-QM lenders in the nation report that their business is growing at a fast pace, even as traditional lenders are laying off people due to the recent rate increases.
Taking advantage of Non-QM and Nonprime lending can serve borrowers, lenders, and Real Estate agents at a time when the market is showing signs of a contraction.