Suppose you are looking for a house where you would like to spend just some years. Though, you have some money issues and experienced them in the past. You are likely to need a financial solution that could allow you to do it and facilitate your purchase. If you are thinking about this, your best option is a non-qualified mortgage.
From the History of the Matter
The crisis broke out in 2008 leaving many loan-users and givers empty-handed. Both qualified and non-QM loans were believed to be almost the primary cause. In the same 2008, the Act on the “Ability to Repay” rule was signed by President Obama. It was meant to regulate QMs (qualified mortgage loans) and created some boundaries for non-QMs (non-qualified mortgages). Only in 2014, the regulations were adapted to the needs of both lenders – of qualified and non-qualified loans — by the CFPB (Consumer Financial Protection Bureau) giving them some liability protection.
Obviously, non-QM loans have started their revival since that time. However, they are not much the same as they used to be. The present-day options emerged as a result of some regulatory instructions and rules making them much safer both for those who buy property on the secondary market to make investments and those who are eager to buy homes.
The Characteristics behind a Non-Qualified Mortgage
That is a special type of loan that allows for paying the interest only on the mortgage that already exists and meant for from 5 to 7 years and at the final stage of this period, a borrower can have some pay off options:
- to apply for the refinancing of their house;
- to agree to pay lump sum;
- to start paying the entire principal.
This loan means that your balance for it will be unchanged. The principal will not be paid off during the first years.
A non-QM is beyond any regulations for qualified mortgages. It is an alternative type to them and is meant for people who do not have a chance to prove their capability of repaying for the mortgage. That is why such loans do not bear high risk. Though, they also need a quite high FICO score. The good news is that not all the requirements which are necessary for a qualified loan should be obliged.
The basic difference between a non-qualified and qualified mortgage loans is that in the first option the protection of the mortgage against all the types of the lawsuit is ensured by a lender while the qualified loan protection is provided by the government. In most cases, people who can apply for a non-QM belong to the following categories:
- those who have a high debt ratio;
- facing unexpected defects in FICO credit due to unpredictable situations;
- being self-employed for under two years:
- displaying low income in their tax returns.
In many cases, a new homebuyer may believe that the own home is completely out of reach if they don’t know the difference between non-qualified and qualified mortgage loans. However, since most people are more Internet-savvy these days than ever, they could easily find all the important information about the differences and make a comparison of various products on the market.
Pros and Cons of a Non-Qualified Mortgage
The advantages of such mortgage loans are quite obvious and well-known. If you get a non-QM loan, you experience the following:
- The payments made per month are quite low.
- The second loan can be larger based on the successful first.
- Due to the low monthly payment, a person who has a big sum of money at their disposal can use it in other ventures and investment projects. At the end of the loan, they have to pay a lump sum but, since their assets have grown, it will not be too difficult for them.
- The monthly payment does not mean paying any tax for it, so they call it tax-deductible.
Of course, non-QM loans have some cons. These drawbacks include the following:
- It may be rather difficult to pay off the principal for some borrowers at the end of the term.
- An acquired home may not bring such income (or not so fast) as it is expected.
- The house rent income may not cover all the expenses on the loan and other needs since there are always risks of some delay or inconsistencies.
Main Categories of Homebuyers Who Win from a Non-QM
So, if you are a potential borrower who is not allowed to get a government qualified loan for any reason, search for a reputable non-qualified mortgage lender. You may especially benefit from such a choice if you belong to such categories:
Investors in Real Estate
Such people receive their income from the house that is bought by them. They do not meet the requirements of the ability-to-pay rule. It happens because they receive their income for letting the estate they buy and then can pay the costs that are demanded.
Loan-getters who are self-employed
They are paid for their work sporadically and cannot rely on stable income. Such borrowers often get available loans due to the number of liquid assets and cash flow they can demonstrate at a certain period.
People from abroad who are non-residents of the U.S.
Those who are non-residents of the U.S. cannot receive a qualified loan because they do not have a necessary credit score. In this case, they can use their local credit data and recommendations from the creditors in their country. The helpful support is obtained from a high income, their stable liquid assets, as well as consent for large down pays.
This term is used for people who have never or rarely used any credits but they are seeking some speculative loans demanding pay-offs for interest only. They can also agree to some offers allowed by a debt-to-income ratio that is higher than 43 percent or even more.
Loan-getters who are non-prime
These people are sure to have a poor credit rate in the past overloaded with bankruptcy or immediate distressed sale of their real estate within the previous 2 years. In such cases, lenders usually set higher down payments or tougher standards to repay to diminish their possible problems.
Candidates who own substantial assets
They can be offered an asset qualifier program of loans. This is a new option for non-QMs. Such borrowers can make good use of it not because they fail to repay – they usually have enough assets to acquire the property immediately – but because they wish to establish the positive flow of their cash and maintain it.
Two questions are left to answer for the conclusion and they are always asked by potential borrowers of non-QM loans. They are the question of such credits’ safety and the issue of whether they are the right choice for a certain person.
Due to all the features and considerations described above, non-QM loans are quite safe when following a certain set of guidelines and regulations to protect your assets from any risks. This is equally true both for borrowers and lenders. The application process is quite simple and transparent, so you can always judge whether it suits your needs.
You are sure to make the right choice for your temporary property if you know for certain that your income will increase in the future. If not, of course, it is a risky venture for you because you will have to repay the combination of interest and principal, and such repay should be made monthly.