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Non-Qualified Mortgage Loans

A non-qualified mortgage loan is defined as any home loan which does not with the Consumer Financial Protection Bureau’s (CFPB) set regulations on the qualified mortgage. A qualified mortgage, commonly abbreviated as QM is a home mortgage loan which meets the standards and rules established by the federal government. The CFPB defined the quality mortgage rule and designed to develop secure loans by limiting or prohibiting certain high-risk features and products. Colorado Mortgage Pro sheds more light on the qualified and non-qualified mortgage loans.

The Qualified Mortgage Rule:

  • The Dodd-Frank Wall Street Reform and Consumer Protection Act charted the features of a QM as follows:
  • No excessive upfront fees and points- The fees and points charged by the lender to the borrower must not surpass 3% of the amount borrowed.
  • There are no toxic loan features- this means there are no balloon loans, no terms beyond 30 years, no interest-only loans, and no negative amortization loan.
  • Limits on debt-to-income ratios- The general rule of the QM is 43%, a borrower’s DTI ratio must not be higher than 43%.

There is usually a temporary exception that is granted for loans which are eligible to be insured or sold buy FHA, VA, or Freddie Mac, Fannie Mae. There are no other exceptions allowed, and any other mortgage loan type which does not conform to the QM rule is classified as a Non-Qualified Mortgage loan.

An ideal example of Non-QM loan is the interest-only loan why is still offered by some lenders. Wealthy borrowers mainly provide these loan types. The CFPB rule requiring lenders to document the ability of the borrower to repay the loan is not included from being considered a QM. This is because the borrowers, at times, face payment shock once they have a responsibility to start paying the principal. This is in most cases after about five to seven years of only paying the loan’s interest.

There are eight factors to consider when it comes to the compliance issue with the ability to repay that lenders must follow strictly:

  1.    The borrower’s current assets and income
  2.    The current employment status of the borrower
  3.    The monthly payment on the covered transaction of the borrower
  4.    The monthly payment on any simultaneous loan
  5.    The credit history of the borrower
  6.    The monthly debt-to-income ratio or residual income
  7.    The current debt obligations, alimony and child support payments
  8.    The monthly payment for mortgage-related obligations

All these eight factors must be considered and documented by the lender originating the mortgage loan.

Non-Qualified Mortgage Loan Programs

Alt-QM Asset

In this loan, the borrower is qualified on the basis of the verified, qualified assets

  • The assets must be appropriately documented to cover the requested loan amount with an additional 60 months reserve to cover all the revolving miscellaneous debts and installment such as alimony and child support.
  • The assets can be cash in the bank, bonds, stocks, 401k’s, mutual funds, IRA’s, or any retirement accounts.
  • Tax returns are not needed in underwriting
  • 12 months of consecutive statements are required for asset verification

Alt-QM Investor

This is designed for experienced real estate investors refinancing or purchasing investment properties to be held for business purposes.

  • Income is neither stated nor verified, and tax returns are not required.
  • The borrower is qualified based on the cash flow of the subject property, precisely the debt coverage ratio, which is 1.25 for refinance and 1.0 for purchase transactions.

Alt-QM Jumbo

  • Maximum DTI of 50%
  • Designed for high credit quality borrowers
  • The maximum cash out of 500,000
  • Foreign nationals are eligible for funding under this program with extra overlays

Alt-QM Agency

  • The loan amount cannot surpass high-balance or conforming loan limits
  • Designed for the high credit quality borrowers with loan parameters falling just under the Fannie Mae and Freddie Mac regulations.
  • 43% DTI ratio, a maximum of 50% with compensating factors

Alt-QM Income

  • Borrower’s qualifying income is calculated by 12 months most recent bank reports in place of the tax returns
  • It is designed for self-employed borrowers with a minimum of two years self-employment history

For more information about the qualified mortgage and non-qualified mortgage loans, contact our Colorado Mortgage Pro specialists today. You can also use any of the tools found on our website for a free consultation.