What is a “Non-Qualified” loan?
A Non-Qualified loan or Non-QM loan is just about any loan that falls out of the “ability to repay rule” mandated by the Dodd-Frank Act which came about after the Mortgage Meltdown and the Great Recession. They could be for people with low credit scores, high debt-to-income ratios or those with not much income but have assets. These new loans play an important role, enabling many people who previously could not qualify to enter the housing market. Lenders that portfolio their loans are able to create their own underwriting guidelines that satisfy their interpretation of the ability to repay. They use underwriting principals that are make-sense and not overly restricted like the draconian measures taken after the mortgage crisis to stabilize the housing industry.
I have helped many people in Santa Barbara and across California who don’t fit into the box of the Big Banks that are so heavily regulated. These loans are still very safe and the borrowers pay a slightly higher interest rate for the privilege of obtaining this non-traditional credit.
How does it work?
Let’s imagine that you had to file bankruptcy after you lost your job and couldn’t keep up with your debt. You then started your own company and after 2 years you applied for a loan to buy a new home since you had to sell your previous one to get out of debt. However, you write off your cars, health insurance and other personal expenses through your business and your taxable income is very low. You go to your bank and they see that your credit score is still low due to the recent bankruptcy and that your income is too low to meet the required debt-to-income ratio guidelines. The banker informs you that he can’t approve you but suggests that you call a mortgage broker that offers Non-QM loan programs. The mortgage broker sees that even though your credit score is still low and that the BK was only 2 years old, you have re-established credit. They also see that even though your tax returns show little taxable income, your gross business income is actually quite high. The solution is a bank statement loan where tax returns are not required to document income. The lender approves your loan, you pay a slightly higher interest rate and you are able to re-enter the housing market. In a few years your mortgage broker calls you up to refinance into a regular loan with a lower rate and in the meantime, your net equity has grown substantially.