After the most recent housing crisis, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law in the summer of 2010 by then President Barack Obama.
Along with other regulatory reform, it created minimum standards for mortgages, including the Ability to Repay rule (ATR) and a Qualified Mortgage definition (QM).
These were later adopted by the Consumer Financial Protection Bureau (CFPB) and put into action on January 10, 2014.
The new rule provides banks and mortgage lenders with certain liability protection when originating Qualified Mortgage (QM) loans, which allows them to make home loans with less fear of buybacks, lawsuits, and financial loss.
As a result, some lenders have begun to originate so-called “non-QM loans,” which as the name implies, do not comply with the Qualified Mortgage rule.
The downside to providing these loans is the lack of liability protection, along with a less liquid secondary market to unload the mortgages to investors.
The upside is that lenders can create a niche for themselves by offering loans many other institutions choose not to originate.
Non-QM Does Not Necessarily Mean High Risk
First and foremost, a non-QM loan is not inherently high-risk, nor is it subprime. It is simply a loan that doesn’t fit into the complex rules associated with QM.
In fact, many of these loans will actually require extremely high FICO scores, along with other strong borrower attributes like steady jobs and plentiful assets.
However, because of the rules and scrutiny associated with non-QM lending, banks will probably keep them on their own books instead of selling them off to investors on the secondary market.
Interest-Only Loans Are Non-QM Territory
For example, interest-only loans are a popular type of mortgage that are not covered by the QM rule. Many lenders will still originate these loans because there is a demand for such a product.
These will probably be the most common loan type under the non-QM umbrella, with high-net-worth borrowers the likely target.
So the risk isn’t necessarily high if they’re being doled out to rich folk who want to invest their money in places other than the mortgage.
Stated Income Is a Feature of a Non-QM Loan
Another common feature of a non-QM loan is the documentation type.
Many non-QM loans allow for stated income, whereas QM-compliant loans must be fully documented via standard income underwriting protocol.
So if you can’t provide fully documented income, you might have to go the non-QM route, even if you have stellar credit, assets, and employment history.
This includes bank statement programs and asset-based lending, as opposed to the typical documentation of income and assets.
Loans with DTI Ratios Above 43% Might Be Non-QM
At the moment, loans backed by Fannie Mae and Freddie Mac, or those insured by the FHA, VA, or USDA, are exempt from the 43% debt-to-income ratio limit imposed by QM.
In other words, many loans can still exceed 43% DTI and get the QM seal of approval.
This may continue if industry heavyweights get their way and the DTI limit is removed from the Qualified Mortgage rule.
However, loans that are in the jumbo realm (loan amounts above what the aforementioned agencies accept) and above 43% DTI are most likely non-QM territory.
This explains the recent trend of using assets to qualify when income falls short, which still satisfies the Ability to Repay rule required for all mortgages.
40-Year Mortgages and Neg-Ams Are Non-QM Loans
Additionally, mortgages with terms beyond 30 years are also prohibited under the new QM rule.
Again, lenders may extend financing with terms beyond 30 years, offering 40-year mortgages and other products that don’t conform to the QM definition to meet public demand.
But they won’t come with the protection afforded under QM.
Another loan program that was highly popular during the previous housing boom was the option arm, its main feature being negative amortization.
This too is banned under the new QM rules, and could be another source of production for non-QM lenders if these loans become popular again in the future, though that remains to be seen and seems unlikely.
Points and Fees Capped on QM Loans
Lastly, upfront points and fees cannot exceed three percent (3%) of the total loan amount to be considered a QM loan. This applies to loan amounts of $100,000 or more.
However, there are exemptions for smaller loan amounts as follows:
- $60,000 to $100,000: $3,000 or less
- $20,000 to $60,000: 5% of the total loan amount or less
- $12,500 to $20,000: $1,000 or less
- $12,500 or less: 8% of the total loan amount or less
So there you have it. Note that because non-QM loans are so new, changes are possible, including an end to the GSE patch in 2021.
An early estimate by analysts at Deutsche Bank Securities puts non-QM loan origination volume at just $50 billion for 2014.
But they believe it could potentially grow to hundreds of billions annually in the future (~$400 billion), though that hinges on the temporary QM allowances going away once Fannie Mae and Freddie Mac exit conservatorship.
In other words, “non-QM” could be a household name in the next decade, just like FHA or VA is today.
Read more: Non-QM mortgage rates could be 2% higher than QM rates.
I own a home with approx. value of 300,000. Going thru a divorce and would like to buy out my ex. My credit is good in the upper 700 and the only payment I have is a car payment at 380.00. My problem is going to be that I just went to work at a new job and am not making that much income. My monthly income is 2426.00 a month. Do use my credit cards every month but pay them off each month. Do I qualify for a NQM
We currently have a mortgage loan with a balloon payment on the end. Our previous mortgage company did a modification for us 5-6 years ago to help us out with medical bills. We should have never combined all our debt at the time, but we did. (water under the bridge now) Our home is not worth what we actually owe in our loan. We would like to refinance to a lower interest rate and possibly lower amount of years. Not sure where to go, but have not had much luck finding a company to refinance for us. We are not late on payments and have good history in paying our bills. Currently we have 4.875% but that is not included in the balloon payment. Do you know where we can go to get help?
Hi Kim. There is hope for you. Call me so we can talk about your situation. I realize it’s over a month since you asked your question and you likely still need help. Text me at 614-335-7895 with your name and number. I’ll give you a call back. Or, you’re welcome to call me on Tuesday, January 2, 2018 at 888.509.3080.
I have been doing Non-QM loans for years now and have closed hundreds. Our most popular reason for going Non-QM is because of a recent short-sale or foreclosure. We also do high DTI (50% , 55% w/ compensating factors), non-warrantable condos, no tradelines, and so on. You can contact me at firstname.lastname@example.org with your scenario or click my website here for a form. Looking forward to helping many more people get back into a home!
I service – CA, AZ, FL, HI, IL, MI , NV, NJ, NC, OR, TX, WA
Hello, I live in Carroll County, MD. I filled for bankruptcy earlier in the year. I need to move by the end of the year and per my research loan payments are more affordable than apartment rents. I tried to apply the conventional loan but I have to wait about 2 years to qualify for those. Does the non-QM loan an option for me?
Hi, if you are interested in non-QM loans please feel free to reach out to 424 343 4526. I work with a non QM loan provider and can connect you with brokers who can possibly work with you. 🙂
Are these non-QM direct lenders charging points? How to find these non-QM direct lenders?
My name is Garth Hendrix and I’ve been in the Mortgage Banking business as a Wholes Account Executive since 1999 and I’ve experience and seen many scary and some good things in the business. And after working at Countywide and New Century, Accredited Home Lenders and the list goes on and on.. And now once again I’m back on the Non-QM Lending side of the business and I’m excited about the 2nd go around because this time it’s all about educating and training my Loan Officers and Brokers in non-prime business and ask what their plan is for this CHANGE! In 2017.
Our industry is going through radical change. It’s not front page news yet but it’s coming.
And I’m Garth Hendrix Account Executive at http://www.Lendsure.com if you have any question I can be reach at 619-817-6857.
I live in RI, my household income is $106k but because of student loans, I cannot seem to qualify for a $200-250k mortgage because my DTI is just over FHA limits. I’ve had credit blemishes in the past and filed bankruptcy in February 2014 but have not had one missed payment since. My credit is 650, I have no credit card debt (just student loans and a car payment) but I keep hitting a wall and I don’t know what to do. I have a few grand in 401k and about 10k saved, what are my options? I liked the first-time homebuyer down-payment and closing cost assistance through FHA since we don’t have a ton of money for a deposit and closing costs as we’d like to use what we have for any improvements to the home. Is my situation helpless? What can I do? I’m looking to buy in RI or MA.
John, I’m an independent consultant that can connect you with a Non-QM Lender that has the ability to help people in situations similar to yours. If you are interested in receiving more information, contact me at (262) 264-0309.
looking to buy property please call 7083310457
Jess Lederman and I are putting together a new book, volume 4 in his series The Mortgage Professionals Handbook, and would like to see if you might be interested in contributing a chapter. This volume will be dedicated entirely to credit risk and I would love to promote the underutilized non-QM market, as I personally see this being the best direction for the industry. You can check out the project at http://www.mortgagebanking2020.com & me personally on linkedin.
Hope to hear from you soon.
If someone has leased a property for 5 1/2 years from a private owner, on a luxury home (estimated at $600k), and never been a day late, and now wants to purchase the property. The lease is higher than what it would cost to own it. How can they be considered for a loan, if their credit is approximately a 660 credit score, and don’t have all of the other qualifications. Also, they have been working in the same insurance business for over 35 years, and have the income to pay a higher mortgage, and is not sure what the DTI is. What do you recommend is the best route to take to secure a loan. Appreciate your input. Thank you
I would look into raising their FICO score. Is the 660 an educational score or a lender’s FICO score? Higher score will give borrowers more options. Scores can be raised with a little effort with the right company.
if you haven’t funded this deal yet let me know, I can fund this deal on a Short-Term I/O program and assist with boosting his score in 30- 60 days so he can get approved. if he has a Down payment and can show the ability to service debt, that’s all i need – We’re strictly asset-based lenders.