Unlike non-qualified mortgage, or non-QM, production in the jumbo-prime space — which matured several years ago — non-QM production for nonprime and hard money loans is still growing because of demand for higher yields in the re-emerging secondary market. Nonprime production, however, has not increased as quickly as many expected.
A lot of originators say they would like to originate more alternative products, such as agency fall-out, bank-statement, bridge and fix-and-flip loans. Their clients are interested in these products and their referral partners are looking for creative solutions. So, why aren’t more industry professionals serving this market?
Many believe it is because lenders’ infrastructures don’t support these programs properly, which makes the origination process clunky and, oftentimes, out of compliance. Because of the lack of certainty that they will close, many mortgage professionals tend to shy away from originating nonprime and hard money loans. Many argue it’s not worth investing time and resources into learning new products or working through a transaction, only to risk their reputation should the process not go smoothly.
Originators are looking for easier ways to originate alternative nonprime and hard money loans, but often find their software doesn’t support it. Many of the most widely used pricing systems within the industry are simply not configured to price nonprime credit grades or hard money loans like fix-and-flip mortgages. Additionally, the standard loan operating systems are not set up to service these loans properly. Because of this, new non-QM lenders are emerging and creating their own software to fill the void.
To achieve success in this new segment of the industry, it is crucial to automate the non-QM process. Ideally, new systems will be focused exclusively on this market and won’t try to awkwardly force non-QM loans through an old system designed to originate agency products.
There are several challenges to contend with when it comes to pricing nonprime and hard money loans, however. First, nonprime loans have loan-level pricing adjustments at each credit grade. These adjustments are based on both derogatory items such as bankruptcies, foreclosures, late payments, etc., as well as FICO credit scores. This system is different from prime loans that use only FICO with no credit grades.
To price nonprime loans accurately, originators need to cross-reference rate sheets with the borrower’s credit report, which takes time and leaves room for error. Hard money lenders traditionally price each loan individually without rate sheets or written guidelines, making it difficult for originators to quote rates and terms accurately. This leads to a sluggish pace for the process, which is unexpected by many real estate and mortgage finance clients who are used to doing business digitally and having transactions move quickly.
A second challenge is that hard money loans like fix-and-flips have additional variables such as loan-to-cost ratios and rehabilitation budgets, which traditional loan-product pricing engines do not handle. This can be solved with non-QM specific pricing engines for use by originators.
“ There is a need for a secure environment where all prequals are reviewed in a timely manner by qualified operations personnel. ”
Working with imprecise pricing commonly leads to frustration, disappointment and fallout as transactions progress. The stakes are often particularly high in the non-QM market, because these products are frequently sought after by investors. Clients building a real estate portfolio can become an excellent source of repeat business for originators who conduct this business masterfully.
There also are considerable challenges when it comes to prequalifying and underwriting these files. Originators want certainty of closing prior to submitting loans to lenders, which triggers the sending of a disclosure set — which can be a hundred pages or more — to their borrowers.
Specifically, prior to submission, originators want to know:
- If they chose the correct credit grade and priced properly;
- If they calculated their borrower’s monthly income correctly with the alternative documentation;
- The loan program’s maximum debt-to-income level;
- What type of assets can be used for reserves;
- How many months of post-close reserves are required;
- If gifts are allowed for downpayment, closing costs and reserves; and
- What other information they need prior to submission to make the process go smoothly.
Originators want the information needed to confidently submit a new file, and they also want fast, accurate and compliant pre-qualifications, or prequals, which many lenders cannot deliver on non-QM products.
Some non-QM lenders do offer prequals, but can’t provide consistent turn times on them because they don’t have enough staff or do not prioritize prequals. Other lenders fall short by not having qualified staff members perform prequals. This can result in contrary underwriting decisions that cause the loss of a relationship for an originator. Lastly, some lenders do not provide their originators with a secure environment to upload prequal documentation, which has other compliance ramifications.
There is a need for a secure environment where all prequals are reviewed in a timely manner by qualified operations personnel. This would provide originators with the confidence in certainty of closing they need to originate nonprime and hard money loans.
Finally, within the re-emerging secondary market, many small wholesalers underwrite files subject to third-party or investor approvals, which results in a double underwrite. This often leads to two rounds of conditions or a declination, again putting the originator in the position of potentially losing a relationship. When utilizing a non-QM lender, originators should therefore confirm third-party/investor approvals are not required if they want to ensure a speedier transaction with certainty of closing.
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Non-QM lending offers considerable opportunity for driven originators looking to grow their business. Real estate agents and investors are always looking for solution-minded mortgage professionals with access to unique programs. Those willing to meet the challenge of providing the same service and consistency on non-QM products that borrowers have come to expect from conventional financing will make the most of this growing market.