Square Peg In Round Hole Mortgages?
Most likely you have noticed that the credit market, especially for residential mortgages, just ain’t what it used to be. Instead of offering mortgages to anyone and anybody as long as they had a pulse, nowadays it’s almost the exact opposite. Not only do you need spectacular credit, a significant down payment amount, or existing equity in your current home, but you must also have what some call a ridiculously low debt to income ratio. In other words, you’ve got to prove you make money, you have money and you have like no other bills. In some respects you could say the mortgage credit market pendulum has swung too far to the other side.
Yet, as the saying goes, one man’s problem is another man’s opportunity. That is exactly what is starting to show up for home mortgages. The new kid on the block that is starting to become the go to solution for many would be home buyers is the non-QM mortgage.
Definition: QM Mortgage
QM is actually an acronym for Qualified Mortgage. In this case, Qualified Mortgage has nothing at all to do with you, it’s all about the mortgage lender. A Qualified Mortgage (QM) is one that is in compliance with federal mortgage lending rules. These rules were set in place with consumer protections in mind. The QM rules set standards such as a 43% ceiling for your debt-to-income ratios; they impose a 3% cap on the total amount of loan fees that can be charged, and they prohibit outright negative amortization loans or interest-only payments.
Definition: NON-QM Mortgage
As you might suspect, a non-QM mortgage ignores all of the above restrictions. Naturally, you will end up paying a higher interest rate plus you will most likely pay higher fees. In other words, non-QM mortgages are almost the opposite of a QM mortgage.
Can A Non QM Mortgage Make Cents For You?
Maybe. Like most issues regarding your personal finances it depends on you and your personal situation, your goals and your expectations, that sort of thing. With that in mind take a look at the potential borrowers these new non QM mortgage lenders are targeting.
The Not-Quite There Borrowers
These borrowers are dangerously close to qualifying for a regular QM mortgage except that they don’t. You know the saying about close only matters right? Something like close only counts in the game of horseshoes or in combat when you are tossing a grenade. In the world of mortgage qualification, close doesn’t do the job. This could be a consumer with a debt to income ratio of 47% versus the federal standard of 43%. In this case, if everything else is in line, this consumer could well qualify for a non QM mortgage.
Business Owners Or Self-Employed Individuals
Although you might hope that mortgage lenders would recognize the value of owning a business or being self employed, the reality is that qualifying for a traditional mortgage is a big hurdle for this group. Consider there is no history of paystubs to examine or worse, the tax filings may be more complicated than a normal IRS Form 1040. In other words, even though this consumer could in fact be less of a credit risk than a salaried employee, the QM rules would disqualify him. Thus, another opportunity for the non QM lender to offer up his solution.
Real Estate Investors
Would you believe that owning more than one property can make it harder to qualify for a QM mortgage? Did you know that investors owning more than 10 properties are more often denied conventional mortgages? Since the mortgage lender is basing new mortgage calculations on proven cash flow numbers, more often than not this is another example where the traditional mortgage lending model falls apart.
It ain’t over till its over. That is to say, if you are turned down by the traditional mortgage lenders now there is another path open for you. Yes, it is absolutely true you will end up paying more. Thus you need to run the numbers and see if they make sense for you and your long term goals. Still, it is reassuring to know that “No” is not the end of the road.
What about You?
There you go, mortgage lending for the rest of us. What do you think? Let us know right here and right now…