Today there are two different types of home loans: qualified and non-qualified mortgage products. Qualified mortgages pertain to those loans that meet the Qualified Mortgage Guidelines as well as the Ability to Repay Rules. Both of these guidelines protect the consumer by disallowing lenders to provide consumers with a loan that they cannot fully demonstrate that they can afford. In simple terms, lenders need to prove that the consumers have the income to afford the loan. Non-Qualified mortgages, on the other hand, are not loans that consumers cannot afford; essentially, lenders verify the documents required in an alternative manner that the Qualified Mortgages do not allow.
Stated Income Loans
Asset verified loans still exist despite the elimination of most stated income loans. Most lenders that offer asset verified loans have strict requirements regarding what the borrower must provide. First and foremost, the asset statements must verify the borrower’s income. This is so the lender can meet the Ability to Repay guidelines, as every loan must meet those requirements. Beyond income, however, most lenders require a specific number of months of reserves to cover the loan in the event that your income dissipated. Lenders typically require the reserves to cover not only the mortgage payment, but also all recurring monthly obligations. The exact number of months the bank requires depends on the lender, though.
Investment Property Loans
Investment property loans do not have to abide by the Dodd-Frank Act rules. This is because the housing industry looks at investment properties as a business, rather than a consumer purchase. Because of this, borrowers have more leeway in the type of financing they can secure. Every lender has different programs for investors. For example, you might find one lender that requires fully verified income for the investment properties, while another does not require any income verification at all. Sometimes, just the proof of your experience in investment housing purchases is enough for the lender, as long as you meet the credit score and asset verification requirements.
Interest Only Non-Qualified Mortgage Products
Interest only loan still exist, however, they are non-QM loans. In this loan program, you pay only the interest on the loan rather than the principal and interest for a specified period. Each lender has their own timeline regarding how long you can make interest only payments. Once the introductory period ends, you must pay the full amortized mortgage payment, which includes the principal and interest. Remember that this will create a dramatic increase in your mortgage payment, which could create “payment shock.” If you do take an interest only loan, you have the option to pay down the principal even during the initial period in order to bring the principal down and decrease the payment increase when the introductory period ends.
There are several ways you can secure the interest only loan. Most lenders offer a fixed rate interest only loan, which means that your payment only adjusts for the principal for the remainder of the term. For example, if the interest only portion of the loan was for 10 years and the full term is 30 years, the lender would amortize the remaining principal over the next 20 years. Some lenders do offer an adjustable rate interest only loan. In this case, the introductory period provides you with a slightly lower interest rate, while requiring only interest payments. Once the introductory period ends, not only will the lender add your principal to the payment, but your interest rate could adjust according to the economic indices indicated in your closing papers.
Non-Agency Mortgage Programs
Non-agency programs are those loans that offer you financing despite a high debt ratio. Qualified Mortgage guidelines restrict lenders to providing loans to borrowers with a debt-to-income ratio no higher than 43%. This can pose a problem for borrowers with irregular income or those purchasing houses with jumbo loan amounts. In order to get around the 43% requirement, non-qualified mortgage products offer an alternative. Lenders can provide financing to borrowers with higher debt ratios as long as they ensure that the borrower can afford the loan. This goes back to the Ability to Repay Rule, which every loan needs to meet. Lenders must prove that they verified the income in the manner they deemed necessary, in order to ensure the borrower could afford the loan.
Loans for High Net Worth Borrowers
Sometimes banks come across borrowers that are high-net worth individuals, but that do not have a consistent income. If these borrowers can qualify for the loan based on their assets alone, there are many banks that offer Asset Qualifier loans. These non-QM loans rely on the verification of assets rather than income. Many banks offer these loans in very high loan amounts, up to $2 million. Typically, they are for owner occupied properties only and credit scores must remain above 680. Generally, banks require a significant down payment of at least 30 percent for this program as well.
The key to finding Non-Qualified Mortgage Products is to shop with smaller lenders. Larger banks might have a few programs available, but for the most part, the smaller banks that hold their own portfolios are the right fit. These banks enable self-employed, high net worth individuals, borrowers with high debt ratios and borrowers that prefer interest-only payments to secure financing. The programs are not any riskier than an agency program because they must pass the Ability to Repay rules in order to ensure affordability for the borrower. This way both the bank and the borrower receive proper protection and people that do not fit the Fannie Mae/Freddie Mac guidelines can still secure financing.