The birth of Non-QM lending.
In 2014, the Consumer Finance Protection Bureau, primarily in reaction to the mortgage crisis of 2008, established the qualified mortgage. A qualified mortgage is simply a mortgage that adheres to a set of federally mandated criteria for originating a loan. Qualified mortgages also support the risk parameters required for purchase, insurance, or guarantee through the Federal Housing Administration, Veterans Affairs, United States Department of Agriculture, or a Government-Sponsored Enterprise (GSE), such as Freddie Mac and Fannie Mae.
Non-QM loans, mortgages made outside the government-sponsored mortgage market, fill the void for the tens of millions of credit-worthy borrowers who don’t fit the qualified mortgage mold.
Not everyone who wants and can afford to take out a mortgage can provide the credit history and/or employment and tax documentation necessary to obtain a qualified mortgage. Self-employed borrowers, business owners, and entrepreneurs who technically ‘work for themselves’ cannot produce the traditional employment and income documentation such as a W2 to verify their income. First-time home buyers typically have a thin credit history. Some borrowers fall outside specific qualified mortgage requirements, such as a less than 43% debt-to-income ratio. Non-QM loans are often an option for those who have had a credit event in the past – perhaps a bankruptcy or late payments on a previous mortgage. That said, it is a myth that Non-QM loans are only for higher-risk borrowers with poor credit.
What makes a top Non-QM lender?
Mortgage lending, QM or Non-QM, is complicated simply because there are a lot of moving parts. The application and approval process can be time-consuming and, in some cases, mind-boggling. There are different types of loan terms and rates that vary from lender to lender. Origination fees, such as title and closing costs, also impact the overall cost of the loan. Then, there is the service experience itself. How responsive is the lender? Do they keep all parties in the loop and provide frequent status updates? How fast can they get the loan to closing?
Here is a quick list of the five most important qualities in a top Non-QM lender:
- Multiple Non-QM Qualifying Programs: The more ways that a lender can qualify a borrower, the more likely they’ll be able to offer a loan.
- Product Variety: Different borrowers have different needs.
- Underwriting Strength and Flexibility: Some Non-QM lenders have more flexibility than others to make underwriting allowances and exceptions.
- Competitive Pricing: There are pricing variances within the Non-QM market, just as there are within the traditional mortgage market.
- Service Quality: The overall quality of the lending experience — for all parties involved — is the most important satisfaction metric of all.
#1: Non-QM Qualifying Programs
As part of the approval process, lenders must evaluate a borrower’s income and ability to repay. Traditional mortgage lenders typically use a W2 and employer information to do so, but the self-employed or business owners are often unable to provide traditional documents.
More innovative, top Non-QM lenders have multiple programs available to qualify a borrower. For example, bank statement programs use 12-24 months of recent bank statements to confirm borrowers’ income and cash flow. Business expense calculation programs determine a business owner’s ready cash-flow by deducting regularly recurring business expenses from revenues. Asset utilization programs use a borrower’s financial assets, including personally held stocks, bonds, mutual funds, and vested amounts of retirement accounts, to ensure the borrower has the liquidity, if necessary, to cover the loan.
#2: Product Variety
Having a variety of Non-QM products allows lenders to meet the needs of different borrowers. Expanded-Prime products are ideal for the self-employed and business owners. Non-Prime products enable first-time homeowners with a thin credit history or borrowers with a past credit event to fulfill their dream of homeownership while building or rebuilding their credit history. Business purpose loans, such as DSCR (Debt Service Coverage Ratio) mortgages, allow property investors to grow their portfolios.
In addition to these core products, certain variables such as FICO score requirements, loan-to-value ratios, and maximum loan amounts also make Non-QM loans more accessible to a broader range of borrowers. Interest-only mortgages and mortgages for Non-Warrantable Condos (condominiums that don’t fit the criteria for a traditional mortgage) also expand a Non-QM lender’s ability to serve more borrowers.
#3: Underwriting Strength and Flexibility
Non-QM mortgage applications, just as traditional mortgages, need to be evaluated by underwriters as part of the loan approval process. Every loan is subjected to an itemized checklist of documentation that includes tax documents, income and revenue documentation, credit reports, and financial obligations such as alimony and/or child support. Property information is also evaluated, including the appraisal report, property tax amount and status, rental income history (for investment properties), and flood zone determination.
Since Non-QM loans are atypical, top Non-QM lenders have seasoned in-house underwriting teams that take a responsible yet common sense approach to underwriting. That means they can quickly assess each loan and borrower’s creditworthiness on their own merits and, when warranted, be flexible and make exceptions.
#4: Pricing and Costs
Non-QM interest rates tend to be slightly (and only slightly) higher than conventional loans. However, as with traditional mortgages, interest rates can fluctuate from Non-QM lender to Non-QM lender and from loan to loan. Top Non-QM lenders offer competitive rates and are willing to be transparent about their calculations. They are clear and forthcoming about any fees or costs, such as appraisal, title, and settlement fees. One advantage Non-QM loans have over traditional mortgages? No private mortgage insurance requirement!
#5: Service Quality
The mortgage business, QM or Non-QM, is ultimately a service business. While various programs and products, strong underwriting, and competitive pricing are essential, the experience itself can be the biggest differentiator.
Top Non-QM lenders invest in technologies that automate parts of the process while giving borrowers transparency and convenience. That said, old-fashioned service, including responsiveness, quick decisions, and prompt and well-coordinated closings, are the reputation-building qualities that borrowers want and remember most. Top Non-QM lenders set very specific turn times for every step of the mortgage process and monitor their performance on every loan.
As Non-QM loans become more mainstream and competition heats up, Non-QM loan brokers and the borrowers they represent will realize they have a real choice among Non-QM mortgage lenders. The Non-QM lenders that work diligently at earning high marks against the five criteria detailed above will continue to build stronger reputations, capture a greater share of volume, and claim and maintain a deserved status as a Top Non-QM Lender.