Fannie and Freddie’s primary purpose is to provide liquidity for the banks, credit unions, and mortgage lenders who provide home financing, ensuring that mortgage originators are able to free up capital to fund more loans. Non-QM loans are not sold to Fannie Mae and Freddie Mac, the two government-sponsored agencies that purchase most of the qualified mortgages originated in the U.S. QM loans also have restrictions on the number of points and total fees that lenders can charge and also prohibits lenders from structuring the loans with non-traditional characteristics such as a balloon payment, negative amortization, and short-term fixed rates that significantly increase once the fixed period expires.Ī non-QM or non-qualified mortgage, on the other hand, is a loan that does not need to meet the strict requirements mentioned above. In order for borrowers to show ATR, there are maximum debt-to-income ratios that must be met to ensure that borrowers can afford the mortgage payments. Some of the qualification factors include income, assets such as savings or investment accounts, and monthly debt obligations such as car and credit card payments. To be eligible for a QM loan, borrowers must meet specific requirements that show that they are able to pay back the loan - referred to by the industry as “ATR” or “ability to repay”. As part of this legislation, a qualified mortgage was defined as a home loan that meets certain criteria which make the loan less risky for lenders, investors, or other entities who purchase the loans, and for consumers who have to pay back the loans. Specific provisions around mortgage lending were enacted around 2010 with the roll-out of the Dodd-Frank Wall Street Reform and Consumer Protection Act which was put in place to help prevent another financial crisis. The delineation between a qualified and a non-QM mortgage came about in response to the financial crisis of 2008. But for some, this will not be a hinderance because it allows them to accomplish their goals.įor more information on the mortgage options that are currently available, contact us and we can work with you to evaluate all your options and identify the mortgage that fits your situation.To explain what non-QM lending is, we should start with an explanation of what QM or a “Qualified Mortgage” means. You will see rates range 1% to 4% above conventional interest rates depending on specific circumstances. Because these loans carry more risk, they tend to have higher interest rates. These programs allow for alternate documentation for income, allow for lower credit scores, and can be more forgiving of negative credit events. They are a good financial tool because they help people who cannot otherwise qualify for a conventional, FHA, or VA loan to get a mortgage. Non-QM loans are becoming easier to get as the fiscal crisis recedes in the rear-view mirror. Why Non-QM Loans and Non-Traditional Mortgages Are Coming Back Non-QM programs include Stated Income mortgage programs and mortgages that only look at the Debt Service coverage ratios are available for investors.Non-QM loans generally require shorter time for a prior bankruptcy or foreclosure and in many cases will allow lower credit scores and is more forgiving of negative credit events.Also, for this type of loan, the qualifying income is based upon 12 months of bank statements instead of tax returns. It requires you to have at least two years of steady employment history. Non-QM loans can be helpful for the borrower who is self-employed.Assets may be stocks, bonds, IRAs, cash, 401ks, etc. Asset Programs: The borrower does not have regular income but has sufficient investments and liquid cash to make mortgage payments.However, some loans with higher DTI that are backed by FHA, Fannie Mae or Freddie Mac may qualify as QM loans. Higher debt to income ratios: Jumbo loans that are more than 43% DTI are usually non-QM loans.Interest only: These loans were very popular in the past, but today they are not QM loans.The following are good examples of non-QM loans today: Generally, non-QM loans are designed today to offset some of the risks of the past. It just means that loan does not follow the QM definition. After the new CFPB rules were adopted, loans that did not stick to QM standards were found to be non-QM loans.Ī loan that is non-QM is not necessarily a higher risk loan. Also, the CFPB began the Ability to Repay minimum standards. This reduced the risk with fewer mortgages ending up being delinquent or in foreclosure. This gave mortgage lenders protection on loans that met standards set by the federal government. In 2014, the Consumer Finance Protection Bureau (CFPB) adopted new rules that defined qualified mortgages (QM). A conventional mortgage, FHA, or VA loan are all considered qualified mortgage loans. A Non-QM mortgage is a Non-Qualified Mortgage loan.
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