When you finally get that approval for your bank statement or stated income loan, you can feel like you are on top of the world, but don’t celebrate too quickly – you need to make sure you can afford the loan before you sign on the dotted line. What does affordability have to do with anything? And why does it matter so much with a non-qualified loan? It’s simple – non-QM loans do not come with the guarantee that you are protected. A Qualified Mortgage means that your lender is responsible should you become unable to afford the loan because lenders are supposed to do their due diligence in ensuring that you meet the strict QM guidelines. If your debt ratio is actually higher than they calculated or they provide you with unattractive terms, you might have the right to take legal action. With a non-QM loan, you do not have that option, which means you need to pay close attention to what you can afford.
The Ability to Repay Rules
The Ability to Repay Rules are what drives the success of the non-qualified loan. It is how lenders are able to come up with their own requirements while still having the need to be held accountable to ensuring that borrowers can afford the loan. Non-qualified loans are basically the new stated income loans, but with more accountability. The lender is no longer allowed to take your word for it that you make enough to take on a new mortgage – you have to prove it, even if it is in an alternative way, such as with bank statements as opposed to tax returns.
Affordability is Key
Affordability does not just mean that your debt ratio meets the requirements of the lender – it means that you truly can afford the loan in real life. What you can afford on paper might not be what your abilities are in reality. When the lender pulls your credit, the only expenses they see are the monthly costs reporting on your credit report, such as your credit card bills, car payments, and student loans. They do not see things like tuition, groceries, utilities, and insurance payments. You need to factor all of these things in when you apply for a loan so that you know how much you can truly afford. This is for your own good as well as the good of the lender. The fewer people that default on their loans, the more likely it is that the lender will be able to provide loans to more people in the same category as you.
It’s the Law
The honest truth, however, is that it is the law that the lender determines your affordability. If the lender cannot prove that they did their due diligence in determining your income and debts, then they could face penalties as a result of providing the loan. This is why loans such as the NINJA, No Income, Job, or Asset loan or the No Doc loan are no longer a possibility. Every loan must have adequate proof of affordability whether in the standard form, such as tax returns or paystubs or in an alternative form, such as bank statements.
In the end, you are proving your income in one way or another; you just have to find the lender that is willing to accept your form of proof. Every lender has a different method that they are able to accept as well as a level of risk they can take on. If one lender turns you down, shop with others as you will find a variety of programs that are available out there.