How to Get a Workaround for the Non-Qualified Mortgages

Many lenders are concerned about the advent of Qualified Mortgages (QM), with the federal government implementing standards and compliances for mortgage loans. The concerns are for the potential litigations rising in future due to, when and if, the borrowers default on payments. But there are industry experts discussing opportunities which exist beyond the barriers of QM. These opportunities are for lenders to make profits and deal with mortgages having extremely low liabilities.

Identify the borrowers with minimum risk potentials from the ‘unqualified’ mortgages

One of the data firms has mentioned in their reports that around 60% of mortgages will not qualify as QMs. Within this percentage of mortgages, there are loan programs which have the debt-to-income (DIT) ratio exceeding 43%; completely unacceptable under QM norms. The mindset – all DTIs surpassing 43% will be defective – with which the norm was drafted is wrong. In this list of defective DTIs, there are borrowers who have excellent credit history, have made 25% to 30% down payment for a house, can provide paperwork showing their assets and income, and can also prove their employment under professional occupations for a term of more than five to six years. With these kinds of borrowers the loans are incredibly safe; ideal for non-QM programs.

What should good non-QM programs carry?

A well-thought and well-structured non-QM program will always have credit standards which brilliantly handle the concept of compensation factors. The criteria should extensively lower the chances of payment defaults and any other triggers/factors making the borrowers opt for legal challenges. Also, the program should be encouraging buyers to go for at least a 20% down. The interest of the borrowers to make the down payment can be gauged from their credit scores. The higher the score, higher are the chances of borrowers willingly going for the expected downs. The programs can also benefit if they are developed focusing on certain occupations, such as government employees.

Keeping these ideas in mind, imagine what kind of programs the credit unions can work on if they tap into their vast and exclusive databases filled with customer information.

Amortization and ‘interest-only’

How about pitching programs with features like negative amortization and interest-only periods to high-income earning consumers? To financially decent borrowers, these kind of flexible programs are often quite appealing. Of course, risks with these programs are high. But one of the precautionary measures while marketing such programs is to avoid doing it on a big scale. The filtering and screening process for identifying the right type of clients needs extreme supervision, which falters if the numbers go drastically higher. 

This could very well affect the availability of mega (or jumbo) loans because they do not conform to the Fannie/Freddie loan limits. This means that they will not be deemed qualified if the debt/income ratio of the borrower exceeds 43%.

Every situation carries opportunities; sometimes its windows are smaller and sometimes bigger. Same goes with the advent of QM. While there are some fears, there is also some hope floating around. So give a thought to these workarounds.

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A Quick Overview of the New Mortgage Rules

The new mortgage rules require lenders to tighten their underwriting norms. They are designed with the objective of reducing the risks of loan defaults and foreclosures. The new rules apparently promise 'no surprises, no debt traps and no runarounds'.

Lenders now have to comply with 2 new requirements: The Qualified Mortgages and Ability to Repay. Here is how these two new requirements will affect the borrower.

Ability to Repay

Lending institutions are required to verify that the borrower has the assets and income required to afford the monthly payments throughout the entire life of the mortgage. In order to determine this, the lender may assess the borrower's debt-to-income ratio.

To calculate the debt-to-income ratio, you just need to add up your monthly expenses and divide that figure by your monthly income.

Low-Doc loans

Earlier lenders used to offer low-doc or no-doc loans without verifying the financial credentials of the borrower. However, the new mortgage rules require the lender to verify and document the borrower's income, debt, assets and credit history. This will involve more paperwork. It may also prolong the processing times. However, the new rules will ultimately benefit both the borrower and the lender.

Underwriters are also required to approve mortgages on the basis of the maximum monthly payments the borrower will have to make. They are not supposed to approve loans based on the lower teaser interest rates which last only a couple of months or years.

Qualified Mortgages

This rule ensures that the borrower will not buy a bigger home than s/he can afford. The new mortgage rules insist that a borrower's debt-to-income ratio should be less than 43%. There are exceptions to this rule and banks can issue mortgages to people with higher debt-to-income ratio if they are convinced that the borrower has assets that justify the higher loan amount.

The term of a qualified mortgage cannot be longer than thirty years. They also cannot have risky features like interest-only payments and minimum payments that do not cover the whole of the interest cost. If your monthly payments fall short of your interest cost, your mortgage balance will grow. This is called negative amortization.

In addition, the upfront fees that banks charge cannot be more than 3 percentage of the loan balance. That includes origination fees, title insurance and any points paid to reduce mortgage interest rates.

There are also rules that discourage lenders from offering financial incentives to mortgage brokers and loan officers for pushing borrowers into higher-interest mortgages they can't afford. The new rules will offer borrower protection without limiting their access to credit.

Lenders also seem to be happy about the new mortgage rules. The only concern they have is that the new rules might slow loan processing.

Interestingly, the new mortgage rules do not specify a minimum credit score or down payment requirement.

The fact that there is no minimum down payment requirement will benefit most first time homebuyers who might find it difficult to raise that much money. The lack of credit score requirements might enable banks to loosen their underwriting practices sometime in the future. That said, loans still need to be supported by Freddie Mac and Fannie Mae. Since these organizations are unlikely to approve applicants with credit scores below 620, most borrowers need to have a credit score of at least 620 to qualify for a mortgage.

Buy and work leads smarter, contact only the customers you want to engage, and enable your employees to be productive. Connect with your target audience with Live Connect today!