Like mortgage rates on traditional home loans, there can be a very wide range of rates offered on non-QM loans depending on the specific loan scenario.
The same basic factors that drive Qualified Mortgage rates are in play on non-QM loans, though the difference might be fewer restrictions (in terms of what lenders can charge) on the latter.
For example, APRs on Qualified Mortgages need to stay within 1.5% of the Average Prime Offer Rate (APOR) in order to receive the highly sought-after safe harbor.
Because non-QM loans don’t receive these protections, you can expect mortgage rates to be higher, all else being equal.
Fewer Lenders Means Higher Rates
This is further exacerbated by the fact that non-QM loans typically don’t meet the underwriting guidelines of Fannie Mae, Freddie Mac, the FHA and VA, and so on.
There’s a reason they’re often referred to as “near miss,” “agency fallout,” “Alt-Agency,” or even “Outside of Dodd-Frank.”
Simply put, there is a smaller pool of lenders willing to make the loan the borrower seeks.
And fewer choices ultimately means higher rates, especially when they know the borrower might be desperate for financing.
How much higher depends on all the pricing adjustments involved. As noted, both QM and non-QM loans are priced similarly.
For example, there will be hits for things like credit score, loan-to-value ratio (LTV), property type, loan amount, DTI, documentation type, and so on.
So a vanilla non-QM borrower (if that even makes sense) might be able to get the lowest rates on offer from the non-QM lender.
Non-QM Mortgage Rates Probably 2%+ Higher than QM Rates
But even then, their best rates will likely be a couple points higher than what the same borrower could obtain if their loan was a Qualified Mortgage.
Remember, the non-QM lender knows you’ve got fewer places to turn for financing, and that means a higher rate, even if you’ve got a stellar credit score and a low LTV.
These lenders also need to make money, and have fewer investors willing to buy the loans, so you’re going to be charged more.
Assuming you’re the best non-QM borrower you can be, thanks to that excellent credit score and a 60% LTV, interest rates will still likely be 2% higher.
Sure, Freddie Mac says 30-year fixed mortgage rates averaged 3.65% this week, but your loan won’t be backed by Freddie, or Fannie for that matter.
As such, you might be quoted a rate of 5.99% instead. Oh, and your mortgage will likely be adjustable, probably a 5/1 ARM, meaning the rate can adjust (even higher) in 60 months.
Remember, that’s for the good loan scenario. Once we start throwing in adjustments for things like marginal credit, a high DTI, a previously missed mortgage payment, an interest-only option, and a non-owner occupied property, the rate can skyrocket.
Don’t forget the fees either – non-QM lenders may also pile on some flat fees to get your loan to the finish line as well.
Now the Good News About Non-QM Mortgage Rates
Okay, so far, things don’t sound too hot, right? You’re probably not getting a 3% mortgage rate like your neighbor, or anywhere close to it.
In fact, your non-QM rate might be double your neighbor’s, or even higher than that. And it’s not even fixed!
But wait. Before you stress too much, consider the fact that a non-QM loan is often a temporary solution.
The financing you need might only be required for a year or two, or even less time than that.
Ideally, the non-QM loan acts as a bridge to something better, assuming you’re able to rectify your credit, document your income, or do whatever else needs to be done to get back in the good graces of the Qualified Mortgage rule, or just an everyday jumbo lender.
Another sliver of good news is that more and more lenders are rolling out non-QM loan options, so you actually have the ability to shop around without feeling completely desperate.
If you don’t take the time to shop, like many QM borrowers, you’ll probably pay more than you have to for your home loan.
In other words, put in the time, especially since you’re a non-QM borrower.
There have been studies, including one from Zillow, which noted a greater disparity in mortgage rates offered for those with lower credit scores.
This is probably true of non-QM loans too – our guess is there’s a massive range of rates offered to homeowners nationwide, much more so than what’s seen on agency (Fannie, Freddie) and government (FHA, VA) home loans.
In closing, don’t stress, just know that your unique situation requires a special solution, and there might be a price premium associated.
Do your best to find the lowest rate as you would anything else you shop for, and make it a goal to get traditional financing (via refinance) as soon as possible to get your rate down.
(flickr photo: Marco Verch)