What You Need To Know About Non-QM Loans
Imagine this scenario: you find your dream home, you apply for a mortgage, yet the mortgage that you applied for is called a “Non-QM” loan. You ask yourself, what does it mean? In this article, we will answer this question and give you some straight facts about Non-QM Loans.
A Historical Perspective
In 2008, there was a housing market bubble that burst. This gave birth to reforms that aim to address the then-present situation. Hence, the Dodd–Frank Wall Street Reform and Consumer Protection Act was signed into law. It was passed and signed by President Barack Obama in 2010.
Basically, the new loan protects the lenders of mortgages to face less risk and have liability protection when it comes to giving out a mortgage. This new trend gave birth to a new creature, the non-QM loan category.
What are Non-QM Loans?
The term ‘Non-QM’ Loans stand for non-qualified mortgage loans. It means exactly what the term means, it is not qualified for a mortgage.
As the historical perspective has shown, it is another banking creature created by lenders to allow a different species of borrower to apply for a mortgage.
In order to understand what non-QM loans are, one should first understand what QM loans are. According to the Consumer Financial Protection Bureau (CFPB), there are three basic qualified loans of this nature, they are:
- General QM Loans
The General QM Loans are called as such for the reason that it has the following characteristics. First, it may not contain certain provisions such as a paying interest-only, negative amortization, or a requirement for balloon-payment features. Second, the terms require that it must not exceed more than 30 years. Third, the loans must be created in such a way that the borrower would pay full amortization with the maximum interest rate. Fourth, the borrower must have a debt to income ratio of less than or equal to 43%.
Those who aim to exact this kind of insurance must verify and consider the following:
- The consumer’s income;
- The consumer’s assets;
- Current debts and obligations; and
- Other obligations and payables such as child support and alimony payments.
Finally, the points and fees to be paid on QM loans should conform to the 3% cap set.
- Temporary QM Loans
Temporary QM loans are almost exactly like the General QM loans except that the borrower must also be qualified for housing assistance of guarantees such as that provided by the FHA, VA, or USDA. This specific category of QM loans is not permanent and has an expiration date according to the law. It will expire by no later than January 10, 2021 which is just a few years from now.
- Small Creditor QM Loans
These loans are qualified as such for the sole reason that it refers to those loans granted by a small creditor. To be considered as a small creditor, an organization must have less than $2 billion in assets.
Overall, anything that falls outside these categories are non-QM loans.
Characteristics of Non-QM Loans
Non-QM Loans have a specific set of characteristics and they are the following:
- A non-QM loan does not mean a high risk subprime loan but it means that the loan did not conform with the requirements of QM loans.
- Interest paying loans or interest only loans are all non-QM loans. Since most of these loans require a certain level of income, the high risk investors are more ready to go for the non-QM route for the possibility of a high return.
- Any loan that exceeds 30 paying years is a non-QM loan.
Now that you know some basic facts about Non-QM loans, you should always aspire to go for the QM loan path. It is always easier to enter QM route because the government has already provided a certain level of liability protection for it.
This is should be a prospective customer's number one call to action, e.g., requesting a quote or perusing your product catalog.