If you need a home loan but cannot meet the lender’s stringent borrower requirements, a non-qualified mortgage may be the solution. Non-qualified mortgages are discussed in-depth, as well as who they are designed for.
Read on to know everything about understanding non-qualified mortgages.
Non-qualified Mortgage, by Definition
In applying for a qualifying mortgage, a borrower must meet certain conditions, but if you are self-employed or lack the necessary documentation for a conventional mortgage, you may need to consider a non-qualified mortgage.
Traditional qualifying mortgages are the greatest lens through which to view non-qualifying mortgages. To be eligible for a conventional mortgage, you must meet the following requirements:
- Income documentation, such as pay stubs, W-2s, and tax returns, is required.
- Your debt-to-income ratio (DTI) must be less than 43%, which pertains to the percentage of your monthly income dedicated to debt repayment.
- Fees cannot be more than 3% of the loan balance.
- The loan length cannot exceed 30 years.
Mortgage lenders want to know that you’ll be able to pay back your loan. However, if you cannot meet the criteria mentioned above, you may need to apply for a non-qualifying mortgage. Furthermore, the 2010 Consumer Protection Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act set these minimum mortgage standards to shield buyers from hazardous loans.
Almost anyone could get a mortgage in the years leading up to the Great Recession. In light of this, certain mortgages did not require proof of income, and mortgage lenders would unethically force homebuyers to take out expensive mortgages. This reckless attitude aggravated the recession and resulted in the ability of millions of debtors to meet their monthly obligations.
Today, lenders are no longer liable if they follow strict lending laws. Loans cannot be repaid if borrowers later allege lenders were aware of their inability to pay. Non-qualified mortgages (non-QM) are not insured, guaranteed, or guaranteed by the FHA, VA, Fannie Mae, or Freddie Mac.
A non-QM loan allows people with bad credit to buy a house. Self-employed people, business owners, and non-traditional employees need less proof of income. The application for a non-QM loan is nearly identical.
Applying for a Non-qualified Mortgage
If you are unable to obtain a qualifying mortgage, you should consider getting a non-QM. Borrowers who may benefit from non-QM loans include the following:
- A retiree
- A self-employed individual
- A foreigner invests in a genuine entrepreneur
- A buyer with substantial assets but a low income
- A buyer who has a high debt-to-income ratio
- A buyer with an inadequate credit history
Non-qualified mortgages show that mortgages are accessible to all homeowners. Even though you may not have the highest credit score, your salary is low, or your debt-to-income ratio is high, you can get a mortgage.
In understanding non-QMs, you should know that they’re not the same as subprime mortgages. Many individuals feel that non-QM loans are subprime because of the housing crisis. Non-QMs are now subject to their own set of standards. Aside from the loan documents, the manner of financing is nearly the same.
The “Ability to Repay Rule” applies to both categories. Lenders risk facing lawsuits unless they go above and above to verify a borrower’s ability to repay. Ultimately, non-QM mortgages are precisely as secure as any other form of a loan. If you want to get a non-QM loan, shop around for the best rates—choosing the right loan might save you hundreds of dollars.
Are you interested in purchasing home loans in Dallas? New Frontier Financial Inc. is a full-service mortgage brokerage firm based in Dallas, TX. We provide individual and customized financial strategies, low rates, and fast loan approval. Start a new chapter of your life and contact us at (469) 886-8300 today!