The need for non-prime products is growing, as conforming loan rules have tightened. Working with a lender that can only provide standard QM products will limit a legitimate and legal funding resource for many customers.
When non-prime (or non-QM) lending returned to the market again a few years back, it wasn’t welcomed back with open arms. Many critics were concerned that these products were the same as the sub-prime loans that led to the housing crisis and were afraid that history would repeat itself. In fact, sub-prime and non-QM are quite different. New regulations have helped to ease non-QM loans back into the market.
A Few Non-QM Options
- Bank Statement Loans – utilize bank statements for income qualification, not tax returns
- Asset Depletion Loans – utilizes assets, such as stock portfolios or retirement funds, for income qualification
- Debt Service Coverage – allows investors to utilize expected rents as income with no need for tax returns or debt-to-income restrictions
Some non-prime products are misunderstood and are much maligned. Yes, it is true that the financial crash was caused by non-prime products – you can decide if it was the government, or borrowers, or the banks or a combination of all three. I am frequently asked if these
products are legal and are these loans “above the table”.
The answer is a resounding “yes”. These products are certainly legal and they are certainly above the board. For starters, a reputable lender and reputable mortgage loan officer is not going to put their license at risk and knowingly originate a bad loan. I understand there are exceptions to this, but if you ask questions and spend time working with the loan officer you will know if you are working with a LO who has your best interest in mind.
Second, these products still have regulation attached, they have to be underwritten, and they have to fulfill certain requirements of ability to repay, down-payment structure, no prepayment penalties, and FICO scores. These features are different than the days of old. I have attached the article above to provide additional information. Make sure you take time to give it a read.
Source: Why Non-Prime Loans Are Safer Than You Think
A bank statement loan or a loan on a non-warrantable condo are examples of “non-prime” products. A bank statement loan, among other things, can support the private business owner who has significant expense associated with their business and can still satisfy credit and ability to repay. These are individuals who will not qualify under the conventional guidelines of Fannie/Freddie but still have the ability to service a mortgage on time.
Naturally, there are other characteristics of non-prime products which ensure an appropriate level of risk. Interest rates are typically higher than QM products. Required down payments, Loan to Value, and FICO scores usually are more restrictive as well.
Make sure your loan officer has the expertise, products, and processing staff to support your borrower needs. Feel free to call, text, or e-mail me any questions. I am happy to help if I can.
