Non-Conforming Loans and Types of Non-QM Mortgages
In this article, we will cover non-conforming loans and the types of non-QM mortgages for borrowers who do not qualify for traditional mortgage loans.
The difference between non-conforming loans versus conforming loans is conforming loans conform to Fannie Mae or Freddie Mac Mortgage Guidelines. Any mortgage loans that do not conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines are called non-conforming loans.
Conventional loans are called conforming loans. The reason it is called conforming loans is that they conform to Fannie Mae or Freddie Mac Mortgage Guidelines. Lenders do not hold loans they fund in their portfolios. Mortgage lenders used their warehouse lines of credit to fund loans. Once funded, mortgage lenders sell the funded loans Fannie Mae or Freddie Mac.
Fannie Mae and Freddie Mac do not purchase loans that do not conform to their standards. Non-conforming loans are portfolio loans that lenders normally keep it on their books once funded. Or they sell non-conforming loans to the secondary market to institutional investors, financial institutions, insurance companies, insurance companies, or money managers. In this article, we will discuss and cover non-conforming loans and types of non-QM-mortgages.
Fannie Mae and Freddie Mac Conforming Mortgages Versus Non-Conforming Loans
As mentioned in the earlier paragraph, Conventional loans are not government loans. Banks and Lenders do not want to hold the loans they fund in their books. They want to relieve their warehouse lines of credit by selling their loans to Fannie Mae and/or Freddie Mac. In order for Fannie and/or Freddie to purchase these loans, they need to conform to their standards.
Once a lender funds a conventional loan, that lender wants to sell their loan on the secondary market. Most lenders do not want to keep the loans they fund in house. Lenders have a warehouse line of credit. Warehouse lines of credit is like a giant credit card where they use their lines to fund loans. Once the loan is funded, they package them up and sell them on the secondary market to Fannie Mae or Freddie Mac. This is done to free up capital and pay down their warehouse lines of credit and do more loans.
In order for Fannie Mae and/or Freddie Mac to purchase these loans, they need to conform to their mortgage guidelines. Any home loan that does not conform to Fannie Mae or Freddie Mac Guidelines are called non-conforming loans. Non-Conforming Loans have higher mortgage interest rates and higher fees than conforming loans. The best way to understand non-conforming loans is to do a comparison to conforming loans.
What Are Conforming Versus Non-Conforming Loans
Fannie Mae and Freddie Mac are the two mortgage giants in the United States that set conforming guidelines. These two organizations are called government-sponsored entities (GSE).
The purpose of these two GSE’s is to provide a secondary market for home loans. It enables mortgage lenders to originate and fund loans over and over again by the use of their warehouse lines of credit. This is done by lenders selling the loans they fund to these two mortgage giants. Selling them to Fannie Mae or Freddie Mac relieves them of their warehouse line of credit.
Fannie Mae and Freddie Mac WILL NOT purchase any loans that do NOT CONFORM their mortgage guidelines. Fannie and Freddie are bound legally to purchase Conforming loans that conform to their guidelines within a certain loan limit. Any loans that do not conform to Fannie Mae and/or Freddie Mac conforming guidelines are called non-conforming loans.
The Role of The Federal Housing Finance Agency on Conventional Loans
The Federal Housing Finance Agency is the governmental agency that regulates Fannie Mae and Freddie Mac.
Fannie Mae and Freddie Mac are not government agencies. They are Government Sponsored Enterprises (GSE). The role of Fannie Mae and Freddie Mac is to provide stability in the housing and mortgage markets by buying mortgages from financial institutions so these institutions have market liquidity.
Fannie Mae and Freddie Mac the two largest buyers of mortgages on the secondary market. Without Fannie and Freddie, mortgage companies would not have liquidity in the market and would tie up their warehouse line of credit.
FHFA Increases Conforming Loan Limits For The Past Seven Years Due To Skyrocketing Home Prices
The Federal Housing Finance Agency (FHFA) is the government entity that regulates Fannie Mae and Freddie Mac. The FHFA sets conforming loan limits on conventional loans.
The FHFA has been increasing conforming loan limits for the past seven years due to skyrocketing home prices so homebuyers are not priced out of the housing market. Many homebuyers are priced out of the housing market because homes are selling way above the conforming loan limits. The FHFA increased conforming loan limits for 2023 to $726,200.
It is similar to HUD, the parent of FHA, where HUD sets loan limits for FHA home loans. HUD increased FHA loan limits to $472,030 for 2023. FHFA has increased conforming loans limits to $726,200 in most parts of the country starting January 2023. High-Cost Areas have higher conforming loan limits.
California Housing Market and Home Prices
California has the nations highest home prices. Average home prices in California is $757,000. That is double the price of an average home in other states. Many counties in California have are considered high-cost areas.
Conforming loan limits in high-cost areas are much higher than the standard $726,200. High-cost loan limits are cost high-balance conforming loans. The maximum conforming loan limit in high-cost counties in California on single-family homes for 2023 is $1,089,300.
The 2023 conforming loan limit in high-cost areas on single-family homes is now $1,089,300 was an increase from the 2022 conforming loan limit of $970.800. There are loan level pricing adjustments on high-balance loan in high-cost areas. Mortgage rates are higher on high-balance loans in high-cost counties.
Reasons Why Homebuyers Choose Non-Conforming Versus Conforming Loans
Common sense says why even bother with non-conforming loans versus conforming loans. Many folks are under the belief that non-conforming loans are for borrowers with bad credit. Some think non-conforming loans are subprime mortgages. This is not always the case.
Non-conforming loans are mortgage loans that do not conform to Fannie Mae and/or Freddie Mac agency guidelines. Jumbo loans do not conform to Fannie Mae and/or Freddie Mac maximum loan limit agency guidelines therefore are classified as non-conforming loans. Borrowers of traditional jumbo loans need 700 plus credit scores, low debt to income ratios and 20% down payment.
Jumbo loan borrowers are prime borrowers but need non-conforming loans. Gustan Cho Associates has a specialty traditional 90% LTV jumbo mortgages with no private mortgage insurance required with credit scores down to 660 FICO and 50% debt to income ratios.
There are many reasons why borrowers need to go with non-conforming loans. There are many different types of non-QM and alternative specialty non-conforming mortgage loan programs. Non-conforming non-QM loans are not just for borrowers with bad credit, low credit scores, recent bankruptcy and/or foreclosure, or other credit issues.
Many borrowers with prior bad credit do benefit from non-QM and non-conforming loans. However, there are many homebuyers with excellent credit that cannot meet the mortgage guidelines of traditional government and/or conventional loans but will qualify for non-QM mortgages. A perfect example is the 12-month bank statement loans for self-employed borrowers with no income tax returns required. Most self-employed or business owners have excellent credit.
Due to the benefits of using unreimbursed business expenses on their income tax returns, many do not qualify for a mortgage due to lower adjusted gross income. Therefore, bank statement loans for self-employed borrowers are the best loan program for business owners and self-employed borrowers.
Non-QM and Alternative Specialty Non-Conforming Loans
There are several different types of non-QM loan programs. There are no waiting period requirements after housing events with non-QM loans one day out of bankruptcy and foreclosure. Homeowners who were late in the past 12 months with their mortgage payments can qualify for non-QM loans with recent lates on a housing payment.
Non-QM Lenders do have slightly higher rates. Non-QM mortgage rates are based on credit scores, the type of property, the down payment and/or LTV, loan amount, debt to income ratio, compensating factors.
Borrowers with a prior bankruptcy and foreclosure can qualify for non-QM loans one day out of bankruptcy and/or foreclosure with a 30% down payment. 10% to 30% down payment is required on non-QM loans. Asset-depletion loan programs are very popular for retired wealthy individuals without traditional income. The down payment on non-QM loans depends on the borrowers credit scores, seasoning of the bankruptcy and/or foreclosure, and other risk factors.
Types of Non-QM Mortgage Loan Programs
Here are the types of non-QM mortgages available in today’s marketplace:
- No-Doc mortgage loans.
- DSCR mortgages
- No-ratio mortgages
- Profit and Loss Statement-Only Mortgage Loans
- 12-month bank statement loans for self-employed borrowers
- Mortgages one day out of bankruptcy and foreclosure with a 30% down payment
- Mortgage loan with recent lates on a prior mortgage payment in the past 12 months
- No-doc mortgages for primary owner-occupant homes with 20% down payment and a minimum of a 640 credit score
- P and L stated income loans
- Asset-depletion mortgages
- Non-QM jumbo loans with credit scores down to 550 FICO
Non-QM mortgages are for owner-occupant, second homes, and investment property loans.
Bank Statement Mortgages For Self-Employed Borrowers
Bank Statement Mortgage Loans For Self-Employed Borrowers:
- Bank Statement Loans do not require tax returns
- Gustan Cho Associates offers 12 months and 24 months of borrowers bank statement loans
- Bank deposits are averaged to derive monthly income
- Self Employed Borrowers often write many un-reimbursed business expenses
- There are no tax returns required
There are no loan limit caps with non-QM loans.
Loan Limits on Non-QM Loans
- Home Loans that exceed the conforming loan limits is called Jumbo Loans
- Home Buyer needs a home loan that exceeds government and/or conventional loan limits
Types of Property
- Non-warrantable condominium financing are non-conforming loans
- A condominium complex that has over 51% of the units as non-owner occupant-owned is called non-warrantable condos
- Fannie Mae and Freddie Mac will not purchase non-warrantable condo loans
- Condotels are condominium units that are within a hotel complex
- Fannie Mae and Freddie Mac do not purchase Condotel loans
- Gustan Cho Associates offers condotel financing
Qualification Requirements on Non-Conforming Loans
Every lender can have its own separate mortgage guidelines on non-conforming loans. Most mortgage lenders’ non-conforming lending requirements are similar. Here are the basic requirements Gustan Cho Associates has the following loan programs:
- 10% to 30% down payment on non-QM loan programs
- The amount of down payment depends on the borrowers credit score
- With non-QM loans to qualify for a 10% down payment on a home purchase, a 680 credit score is required
- 660 credit score requires 15% down payment on home purchase on non-QM loans
- 640 credit score is the minimum credit score required, a 20% down payment is required
- Lower credit scores requires a larger down payment and there are loan level pricing adjustments
No waiting period after bankruptcy and/or a housing event:
- Deed In Lieu Of Foreclosure
- Short Sale
Debt To Income Ratio:
- 43% debt to income ratio but negotiable
- Up to 50% debt to income ratio with compensating factors
Bank Statement Loan Program For Self Employed Borrowers:
- We offer 12 months and 24 months of bank statement deposits
- Can be business or personal accounts
- 100% of bank deposits are averaged over the past 24 months to derive monthly income on personal bank accounts
- 50% of bank deposits are averaged over the past 24 months to derive monthly income on business bank statements
- 10% to 20% down payment
- Need 720 credit scores for a 10% down payment
- 90% LTV Jumbo Mortgages need 660 credit scores and up to 50% debt to income ratios
Terms and Rates on Non-Conforming Loans
Any mortgage loans that do not conform to Fannie Mae and/or Freddie Mac Mortgage Guidelines are called non-conforming loans. Jumbo Loans are non-conforming because they exceed conforming loan limits.
Mortgage Rates on non-conforming loans are higher than government and conventional loans. Minimum down payment requirements are 10% to 30%. The higher a borrower’s credit scores, the lower the down payment requirements.
There are 30-year fixed-rate mortgages as well as adjustable-rate mortgage loan programs available. There are no pre-payment penalties.
Non-Conforming Loans Is Adding Fuel To The Fire on a Booming Housing Market
With housing prices escalating like it been the past year with no signs of a housing correction, homebuyers who do not qualify for conforming loans now can take advantage of non-conforming loans to purchase a home. If our viewers have any questions on the above topic, please do not hesitate to call or text me at 800-900-8569 or email us at email@example.com.
Gustan Cho Associates is a national mortgage company with no lender overlays on government and conventional loans. We also have dozens of lending relationships with wholesale non-QM and non-conforming lenders. The team at Gustan Cho Associates can offer non-QM loans, bank statement loans, no-doc loans, stated income loan programs, asset-depletion mortgages, non-QM mortgages one day out of bankruptcy and foreclosure, 90% LTV jumbo mortgages, mortgages with prior recent late payments, and dozens of other non-conforming loans.
The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. For more information or to qualify at Gustan Cho Associates, please contact us at 800-900-8569 or text us for a faster response. Or email us at firstname.lastname@example.org.
January 27, 2023 - 9 min read