How do lenders compensate for the risk in their Non QM or nonqualified loan offers?
Since the traumatic crisis that cost the world economy billions in 2008, legislators in the US have passed laws to make sure the same nightmare doesn’t happen once more.
Guidelines are set in place as to what a mortgage should be. These mortgages came to be known as qualified mortgages and are designed to make sure that only the most creditworthy borrowers can borrow money.
That’s a whole demographic of traditional salary earners who have regular paystubs, W2 records, a credit score of at least 620, and a low debt-to-income ratio.
The Dodd-Frank Act saw to it that lenders should first establish a borrower’s ability to repay. For the first few years after the crisis, lenders kept strict to the newly established rules. But as the trauma waned and they realized that there’s a significant portion of the borrower market who are disadvantaged by the current rules, they became to start relaxing on their qualifications.Get today’s mortgage rates!
Thus comes nonqualified loans or nonqualified mortgages.
These mortgages primarily cater to risky borrowers or those who cannot get a mortgage due to their nontraditional qualifications.
Does this mean anyone can just get a mortgage now?
The answer is no. Lenders are still in the position of protecting their own investments. To still tap into the underserved demographic, however, they have found ways to bulletproof their Non QM offerings. They do this by:
Ensuring that the borrower has demonstrated an ability or a willingness to pay.
Lenders may see that a borrower cannot document his or her income easily but has a high credit rating. Your FICO can be your saving grace. Some of these lenders also prefer to lend money to those who’ve already have prior experience with paying a mortgage. This gives them the idea that the borrower is already familiar with the risk and has handled it before.
Imposing a strict documentation requirement. A borrower must be able to show his or her financial records, bank statements, record of assets, and employment history among others. Because some borrowers can’t show traditional documentations, any other alternative record that can be used to assess risk can help streamline the whole process.
More flexibility for high income clientele.
Because most high income borrowers don’t fit the average QM borrower (e.g. individuals with high commission earnings or those with massive investment portfolios). That is why many non QM programs nowadays have been designed to help them still get the financing they need. These borrowers have a hard time getting approved for qualified mortgages despite their rich finances. Nonqualified loans seek to bridge that gap.
Evolving mortgage underwriting tools.
Various Non QM products or nonqualified loans have evolved today, thanks to new tools and origination techniques that help sync risk with opportunity, most of which are driven by tech.
Many borrowers are still wary of nonqualified loans and mortgages due to the terrible experiences of the past. But judging them to be the same as their predecessors is perhaps too naive. Lenders have established their own safety measures to make sure the same disaster does not happen again.Click to See the Latest Mortgage Rates»