Non-qualified mortgages, commonly referred to as Non-QM Loans, are non-conforming alternative mortgage programs for borrowers who do not qualify for traditional mortgages for one reason or another. There is no uniform non-qualified mortgage guideline like government and conforming loans. Each non-QM lender can have its own guidelines on the loan program they are promoting. Lenders normally have a broker or correspondent channel with wholesale non-QM lenders.
USEFUL LINK: The Best Wholesale Mortgage Lenders for Non-Prime Loans
Types of Lenders for Non-Qualified Mortgages
Each non-QM wholesale mortgage lender has its own credit, income, asset, and reserve requirements. Borrowers who cannot for a non-QM loan program from one lender can qualify at a different lender. Non-Qualified mortgage lenders can also make exceptions to lending guidelines depending on each case scenario. For example, non-QM lender A may require three credit tradelines seasoned for 24 months on a non-QM Jumbo bank statement loan. Some non-prime lenders make exceptions for strong credit borrowers with reserves.
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Can Non-Prime Lenders Make Underwriting Exceptions?
Let’s take a case scenario where borrower A is a strong borrower with a lot of money in reserves. Most non-prime wholesale lenders require three credit tradelines. If borrower A only has two tradelines, non-QM lender A may make a special exception if this borrower only has two credit tradelines versus the three required. The shortage of credit tradelines will be honored if it is a strong borrower with compensating factors. NEXA Mortgage, LLC dba Gustan Cho Associates is a mortgage broker licensed in 48 states with over 170 wholesale mortgage lenders and is available to hundreds of non-QM mortgage options for primary and second homes, and investment property financing.
USEFUL LINK: Non-QM Loans After Bankruptcy and Foreclosure
Mortgage Requirements on Non-Qualified Mortgages
There are hundreds of non-qualified wholesale mortgage lenders. Each non-QM lender has its own mortgage lending guidelines for its mortgage loan programs. However, in general, non-QM lenders have higher mortgage rates on non-QM loans and down payment requirements versus lenders of traditional mortgages. There is no set down payment requirement and set mortgage rates on non-QM loans. Non-QM lenders base the down payment requirements, and loan level pricing adjustments requirements on mortgage rates with the risk level of each borrower.
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How Are Down Payments Determined on Non-Qualified Mortgages?
The combination of the borrowers’ credit score and down payment determines the mortgage rates. The higher the credit scores, the lower the rate. The higher the borrower’s credit scores, the lower the down payment requirement. For example, a borrower, one day out of bankruptcy and/or foreclosure will need to put down a 30% down payment due to the recent date of the significant derogatory event. Borrowers with bad credit can shop for the best non-QM mortgage rates. Gustan Cho Associates has hundreds of non-QM loan programs due to its lending partnerships with over 170 wholesale lenders. A substantial percentage of our borrowers at Gustan Cho Associates are borrowers of non-QM and alternative mortgage loan programs. The team at Gustan Cho Associates are experts in originating hundreds of non-qualified mortgage products.
USEFUL LINK: Down Payment Requirements on Non-Prime Loans
Why Do Borrowers Use Non-Qualified Mortgages?
Non-QM loans are considered riskier loans versus government and conforming loans. There is no government agency insuring non-Qualified mortgages. Non-QM lenders do not have a GSE such as Fannie Mae and Freddie Mac purchasing the loans they fund to purchase on the secondary market. High risk means higher rewards. In mortgage terms, high risk by lenders means higher rates and down payment requirements for borrowers. Down payment requirements on non-QM loans range from a minimum of 10% for prime borrowers to 40% for high-risk borrowers. In general, most non-QM lenders require an average of a 20% down payment on non-qualified mortgages.
Non-Qualified Mortgages for Specialty Niche Properties
There are many reasons why borrowers use non-QM loans versus traditional mortgages such as FHA, VA, USDA, and conventional loans. In general, most homebuyers and/or homeowners use non-QM loans because either they do not qualify for traditional loans or due to having a niche loan product they need. Borrowers purchasing or refinancing homes that do not conform to traditional mortgage guidelines such as homes on large acreage, non-warrantable condos, condotels, homes with no nearby comparable sales, mixed-use properties, hobby farms, investment properties, and new construction homes.
Non-Qualified Mortgages Versus Traditional Government and/or Conforming Loans
A substantial number of borrowers use non-QM loans because they do not meet the agency guidelines of government and conforming loans. Borrowers who do not meet the traditional agency mortgage guidelines of FHA, VA, USDA, and conventional loans on a home purchase or refinance often use non-QM loans. Here is a list of common reasons borrowers use non-QM loans:
- Borrowers may have high debt to income ratio due to being self-employed or being a nontraditional income wage earner.
- May not meet the mandatory credit score requirements for traditional loans such as jumbo loans.
- Not meet the waiting period requirements after bankruptcy and/or foreclosure.
- Self-employed borrowers or business owners have negative income on their income tax returns for substantial unreimbursed business expenses.
- Going over the maximum loan limit of government and/or conventional loans.
- Could not qualify for government and/or conventional loans due to having one or more mortgage late payments in the past twelve months.