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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2015

Staking out the Non-QM Space

Strict Qualified Mortgage standards present opportunities for serving nontraditional buyers

The Qualified Mortgage (QM) standard that took effect last year has brought a welcome return to safe and responsible lending practices across the industry. At the same time, however, the QM standard has made the homebuying process more challenging for some creditworthy borrowers who fall outside the stringent criteria required for government and agency loans.

Even so, today’s stricter regulatory climate doesn’t have to be an obstacle to the lending business, because these tighter requirements present an opportunity for originators who understand the needs of non-traditional buyers and can respond with flexible loan options designed to meet those needs. By offering creative non-agency products and non-QM loans, lenders can provide a service for solid but unconventional borrowers.

Of course, offering non-QM products doesn’t mean finding ways to deliver loans that exceed the means of under-qualified borrowers. In every transaction, buyers should still provide full income documentation, demonstrate strong credit scores and meet additional guidelines indicating their ability to repay.

How do you find the right non-agency product to suit your client? Circumstances vary from buyer to buyer, but here are three examples of nontraditional borrowers who can benefit from non-agency products.

1. New high earners

Imagine the case of a recently graduated attorney starting a first job at a law firm or a new physician just beginning a residency. Buyers like these are likely to have high incomes, strong future earning potential and good credit, but they’re also likely to have higher than average debt obligations as a result of student loans.

For new high earners like these, one possible solution is a non-QM loan that allows a debt-to-income ratio that’s higher than the 43 percent maximum imposed by federal QM guidelines. In some cases, non-agency lenders will consider projected income based on a signed contract for employment when assessing the borrower’s ability to repay. New high earners also may be candidates for non-QM interest-only loans, given the strong likelihood that their income will increase substantially in the near future.

2. Recent credit events

Borrowers who have had a recent bankruptcy, foreclosure or short sale may assume they need to wait four to seven years before they can be considered for a new mortgage loan. That timeline does hold true for mortgages backed by Fannie Mae and Freddie Mac, but some non-agency lenders have begun to offer loan products that allow buyers with less-than-perfect credit histories to re-enter the housing market closer to the one-year mark following a credit event. Here again, however, lenders must take steps to ensure that applicants have the ability to repay.

In any case, these second-chance loans frequently require larger downpayments and more conservative loan-to-value (LTV) ratios, along with written explanations of the circumstances leading up to the past credit event and documentation verifying that the hardship has been resolved to the lender’s satisfaction. For buyers ready to move forward, this extra paperwork will be well worth the chance to reclaim their homeowner status sooner rather than later.

3. Jumbo-loan borrowers

Buyers exceeding federal loan limits for a single-family home often find themselves facing high interest rates and limited borrowing options. In these cases, non-agency jumbo loans can provide an alternative for buyers with good credit and strong income whose purchase amounts simply exceed the cap for conventional agency products.

Non-agency jumbo loans often feature higher caps, lower interest rates and higher LTV allowances than their agency-funded counterparts. The best privately backed jumbo products can be tailored to a buyer’s needs depending on whether the loan is for a purchase, refinance, primary residence, or a second home or income property.

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Non-QM lending is still in its infancy, but a growing number of privately funded lenders have begun to fulfill the demand by offering flexible solutions. From non-warrantable condo products to loans for foreign-national borrowers, today’s housing market is defined by its diversity, and that market needs lenders that can offer a wide variety of loans. As the demand for housing remains strong, the need for diverse products will only continue to grow. By anticipating the needs of buyers, lenders and brokers can respond with flexible, responsible loan products that make homeownership a reality for more creditworthy buyers.


 


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