Traditional Mortgage Loans Versus Non-QM Loans
This article covers What Are Traditional Mortgage Loans Versus Non-QM Loans
Traditional mortgage loans, also called conforming loans, are the most conservative of mortgage products. There are two types of traditional mortgage loans:
- FHA Home Loans
- VA Mortgages
- USDA Loans
- Fannie Mae
- Freddie Mac
Government And Conventional Loans
Government Loans are originated and funded by a particular government agency in the event borrowers default on their loan.
- Lenders fund government loans at low mortgage rates and low down payment and/or no down payment due to the government guarantee
In order for the government to guarantee lenders against the borrower defaulting on government loans, lenders need to follow the agency lending guidelines.
- They have established guidelines for borrowers’ credit scores, incomes, and minimum down payments
- For example, a lender may require a credit score between 620 and 740 to make a conventional loan
- Sufficient income to pay the mortgage amount applied
- Down payment requirements are between 5 and 20 percent on conventional loans
- FHA requires 580 credit scores for 3.5% down payment purchase loans
- Borrowers with 500 and 579 can qualify for FHA Loans with an approve/eligible per Automated Underwriting System approval
Any borrowers under 580 credit scores and down to a 500 FICO, FHA requires a 10% down payment.
Conforming Mortgage Guidelines
Conventional loans require borrowers to conform to Fannie Mae and/or Freddie Mac Guidelines.
- Conventional Loans are also called conforming loans
- Any home loans that do not conform to Fannie Mae and/or Freddie Mac or government agency guidelines is called no-QM loans or non-conforming loans
- Jumbo Mortgages are called non-conforming loans because Fannie/Freddie max loan limit is $510,400
Any loan higher than $510,400 is called Jumbo Mortgages or non-conforming loans.
- The market for this type of product includes buyers with excellent credit and a ready down payment
Fixed Rates Mortgages
A traditional mortgage, in its purest form, is a fixed-rate instrument.
- This product allows borrowers to lock in their interest rate
- Most fixed-rate loans are for terms of 15 or 30 years
- However, the term can be any length of time that the lender and borrower agree upon
- Perhaps 15 or even 40 years
- Generally, the shorter the term, the lower the interest rate
Under the terms of a fixed-rate loan, the loan payment is the same each month for the life of the loan.
- If it is important for a buyer to be able to budget exactly his or her mortgage obligation over the long term, a fixed-rate loan is a very dependable product
- Fixed-rate loans are also attractive to home buyers purchasing in a low-interest-rate environment
Several costs are incurred with traditional loans, explained next.
Origination Fees And Closing Costs
Origination fees are upfront charges for making a loan. All purchase and refinance transactions consists of closing costs.
- They serve as compensation for putting the loan in place
Origination fees cover the following:
- processing the application
- underwriting fee
- funding fee
- other administrative services
Closing Costs can be the following:
- origination fees
- appraisal costs
- title charges
- recording fees
- pre-paid (escrows)
- one year homeowners insurance
- attorneys fees
- any other third party charges
Private Mortgage Insurance On Traditional Mortgage Loans
Private mortgage insurance (PMI) is distinguished from the mortgage insurance associated with FHA and Veterans Administration loans.
- Private mortgage insurance is purchased in the private sector to protect the lender if the borrower defaults
PMI is generally required under a conventional loan—and most loans—when the borrower makes a down payment that is less than 20 percent of the appraised value of the home.
- Premiums are paid monthly until the loan-to-value (LTV) ratio reaches 80 percent
- The LTV is calculated by dividing the loan amount by the value of the collateral used for the loan
In order to eliminate PMI, lenders require an approved appraiser to conduct an appraisal of the property and the loan to value needs to be less than 80%.
NON-QM And NON-Conforming Versus Traditional Mortgage Loans
There are instances where homebuyers cannot qualify for traditional mortgage loans and need to seek alternative financing.
- NON-QM Loans are non-conforming loans that give homebuyers who do not qualify for traditional mortgage loans the opportunity to purchase a home now and refinance later
- Agency Guidelines require a mandatory waiting period after housing event (foreclosure, deed in lieu of foreclosure, short sale) to qualify for government and/or conventional loans
- NON-QM Loans do not require waiting period requirements after housing event
- Home Buyers may not qualify for Jumbo Loans because they do not have 700 plus credit scores
NON-QM Loans only require 620 credit scores.
Non-QM Loans Versus Traditional Mortgage Loans For Self-Employed Borrowers
Self Employed Borrowers may not qualify for traditional mortgage loans because of massive losses on tax returns.
- However, bank statement mortgage loans for self-employed borrowers do not require any income tax returns
- Bank Statement Loans for self-employed borrowers average 24 months personal and/or business bank statement deposits and that monthly average is used as borrowers monthly income
- There are no private mortgage insurance requirements with Non-QM loans and bank statement loans for self-employed borrowers
- 10% to 20% down payment is required and the amount required depends on borrowers credit scores
For mortgage information and to qualify for non-conforming loans, please contact Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for a faster response. Or email us at [email protected]