Thanks to strict federal rule changes in the wake of the housing bust, it can be tough to qualify for a loan.
That’s especially true if you don’t quite fit the mold – you don’t conform to all the underwriting mandates on credit, income, debt-to-income ratio and other criteria. You can handle the payments but issues in your application push you outside the box.
Some industry estimates on the numbers of “near-miss” applicants or potential applicants nationwide range well into the millions.
To serve them, a new segment of the mortgage market has begun taking shape: “non-Qualified Mortgage” or non-QM lending. Interest rates are higher than the standard market by three quarters of a percent to 1.5 percent or more, depending on the lender and the application specifics.
QM refers to the federal Qualified Mortgage rules that are designed to foster safe lending. They ban certain loan features such as negative amortization and interest-only payments; set a 43 percent ceiling for debt-to-income ratios; and impose a 3 percent limit on total loan fees, among other requirements.
Lenders jumping into the non-QM space emphasize that they have no interest in funding subprime applicants who lack the ability to repay their mortgages.
Impac Mortgage Corp., a New York Stock Exchange-traded public company based in Irvine, Calif., has begun making loans nationwide – $30 million in the past couple of months – on what it calls “Alternative QM” mortgages to several categories of creditworthy borrowers with special needs:
Near-miss buyers, who almost qualify under standard rules, but not quite. Say they have solid credit scores, good jobs, but have a debt-to-income ratio of 49 percent. They’re likely to have difficulty making it through Fannie Mae’s or Freddie Mac’s underwriting systems, but Impac may fund them after taking a hard look at their bank reserves and assets.
Self-employed professionals and business owners. They generally can’t show IRS W-2 forms and may have irregular income flows, complex tax situations and periodically high debt levels. Impac lets them document their income using 12 months of bank statements and to have debt-to-income ratios as high as 50 percent.
Investors with multiple properties who face significant hurdles when they apply for mortgages. Investors who own 10 or more rental homes or commercial properties and seek to refinance and pull money out are frequently turned down by conventional lenders. Impac evaluates borrowers’ incomes based on the properties’ cash flows and has no limit on total properties owned.
New Penn Financial, based in Plymouth Meeting, Pa., is another early entrant to the non-QM arena. It recently began offering its “Home Buyer Power” loans through retail branches and brokers in 47 states. Brian Simon, chief operating officer, told me the company’s initial target is “prime” credit borrowers who seek high balance mortgages but have debt loads that put them out of reach for most banks.
Bottom line: If you assume you can’t qualify for a mortgage because you depart from federal guidelines in some way, go shopping. The emerging non-QM mortgage market wants to hear from you.