A Non-Qualified Mortgage mortgage is any home loan that doesn’t comply with the Consumer Financial Protection Bureau’s (CFPB) existing rules on Qualified Mortgage. A Qualified Mortgage (QM) is a home mortgage loan that meets the standards set forth by the Federal government. The CFPB defined Qualified Mortgage Rule and designed to create safe loans by prohibiting or limiting certain high-risk products and features.
Qualified Mortgage Rule:
Dodd-Frank Wall Street Reform and Consumer Protection Act outlined the features of a QM as follows:
- No Excessive Upfront Points and Fees – Points and Fees charged by a Lender to the Borrower must not exceed 3% of the total amount borrowed;
- No Toxic Loan Features – (a) No Interest-Only Loans, (b) No Negative Amortization Loans, (c) No terms beyond 30 years, and (d) No Balloon Loans;
- Limits on Debt-to-Income Ratios – General rule for Qualified Mortgage is 43%, a borrower’s DTI ratio must not be higher than 43%.
There is a temporary exception granted for loans that are eligible to be sold or insured by Freddie Mac, Fannie Mae, FHA or VA. No other exceptions are allowed. Any other type of mortgage loan that doesn’t conform to the QM rule is considered a Non-Qualified Mortgage or Non-QM loans.
A good example of Non-QM loan is an Interest-Only loan still being offered by some lenders. These types of loans are primarily provided to wealthy borrowers. The CFPB rule that requires lenders to document a borrower’s ability to repay a loan is excluded from being considered a QM because borrowers often face payment shock once they have an obligation to start paying the principal, often, after about 5 to 7 years of only paying interest on the loan.
The compliance issue with the “Ability to Repay” rule is something that originating lenders have to follow strictly. There are eight underwriting factors to consider:
- The borrower’s current income and assets;
- The borrower’s current employment status;
- The borrower’s monthly payment on the covered transaction;
- The borrower’s monthly payment on any simultaneous loan;
- The borrower’s monthly payment for mortgage-related obligations;
- The borrower’s current debt obligations, alimony and child support payments;
- The borrower’s monthly debt-to-income ratio or residual income, and
- The borrower’s credit history.
All the above eight factors must be considered and documented by the lender originating a mortgage loan.
- Alt-QM Asset
- The borrower is qualified based on verified liquid assets;
- Assets must be documented sufficiently to cover the loan amount requested with an additional 60 months reserves to cover all revolving, installment and miscellaneous debts (e.g. child support, alimony, etc.);
- Assets can be cash in the bank, stocks, bonds, IRA’s, 401k’s, mutual funds or any retirement accounts;
- 12 months of consecutive statements are required for asset verification;
- Tax returns are not needed in Underwriting.
- Alt-QM Investor
- Designed for experienced Real Estate Investor who is purchasing or refinancing investment properties to be held for business purposes;
- Borrower is qualified based upon the cash flow of the subject property, specifically the debt coverage ratio (1.0 for purchase transactions and 1.25 for refinance);
- Income is neither stated nor verified, tax returns not required.
- Alt-QM Jumbo
- Designed for high credit quality borrowers;
- Maximum DTI of 50%;
- Maximum Cash Out of 500,000;
- Foreign nationals are eligible for financing under this program with additional overlays.
- Alt-QM Agency
- Designed for high credit quality borrowers who have loan parameters that fall just outside Fannie Mae and Freddie Mac guidelines;
- Loan amount cannot exceed conforming or high balance loan limits;
- 43% DTI ratio, maximum of 50% with compensating factors;
- Alt-QM Income
- Designed for self-employed borrowers with a minimum of two years self-employment history;
- Borrower’s qualifying income is calculated by 12 months most recent bank statements in place of tax returns.
For additional information about Qualified Mortgage and Non-Qualified Mortgage, contact our Home Loan Specialists at (281) 860-2533 or use any of the tools on this website.