In the past, being a part of the 48% private workforce made up of gig economy workers, self-employed contractors and small business owners would traditionally disqualify a person for a loan or mortgage, but experts say those looking to take advantage of the historically low mortgage rates have other options.
"QM stands for qualified mortgage," said Dustin Owen, the podcast host of The Loan Officer Podcast, in his episode overviewing Non-QM Lending. "OK, if we were to go back to 2010 and we were to look at the Dodd-Frank Act and then the regulation that came through that act, everything from loan officers compensation was regulated to the documents that we used were changed. Something that was put in is they made a definition [of] what is a qualified mortgage and then does that particular loan meet ATR or ability to repay. Because after living through the demise the crash of 2005 and 2006, and every all the loose lending that led up to it."
Non-QM loans are flexible mortgage loans that allow for an applicant to qualify for loan approval based on alternative factors outside the traditional scope of income verification as is required with Qualified Loans, or QM loans.
"Non-QM lending and non-QM loans are loans in which we only need your bank statements to qualify you...if you can show me 12 months of bank statements and I can look at how much, how much money you're depositing on a monthly basis, there's a mathematical algorithm I can use and count that as income to help you qualify right bank statement loan and it's called a bank statement loan," Owen said
A press release from A&D Mortgage stated that the demand for non-qualified loans (non-QM loans) has increased with the changing workforce structure and economy.
Owen explains how following the Great Recession, "guard rails" were put in place on QM loans. Qualified loans are loans in which the balance cannot grow and payments are made on the principal and interest of the loan. These also require income verification or assets to ensure the loan can be repaid, Owen explained. Various disclosures are added in regards to a QM loan as a safeguard for consumers against being taken advantage of. Among QM loans are FA, FHA, Fannie Mae, Freddie Mac, and other conventional, conforming loans.
The podcast host further stated that non-QM loans, unlike traditional loans, can be deemed for persons who are not a citizen or do not have a Visa, for those borrowing for a home that does qualify for financing through traditional conventional loans. Another type of Non-QM loan that is popular right now, Owen says, is a Debt Service Loan. This loan type allows for real estate investors looking to purchase an investment property to get financing and assess if the price of rent will cover the loan payment monthly to be approved. Owen states these are just a few examples of non-QM loans.
According to Owen, 90 to 95% of loans being funded are QM loans with only five to six programs the industry uses. He claims it is good to go in with a mindset of not qualifying and knowing other financing options may be available because for the approximate 5 to 10% of Non-QM loans, the industry uses 12 to 15 different loans.
The A&D Mortgage press release, also said that some benefits of Non-QM loads that many lenders will include are underwriting flexibility; a wide range of income verification options; no requirements of employment history; as little as 10% down; low-income reserves required; a credit score of 620 allowed and others.
"Unconventional borrowers have access to a variety of non-QM loans that fit many different scenarios," A&D Mortgage stated. For example, a real estate investor may make plenty of money buying, renovating, and selling homes, but they don't record that cash flow on a W-2, which is what many lending organizations require to confirm their income. The lack of a W-2 could cause the real estate investor to be rejected for a conventional loan because it appears they don't have the income to pay back the loan." Financial institutions responded to these scenarios by "offering loans to support borrowers who do not fit the conventional loan limits established by the government" that also provide higher lending amounts and more flexibility in terms.
According to the press release, the outlook for non-QM loans is positive as the market has accelerated, demand continues and it is expected for non-QM lending to finish the year with $25 billion in mortgage origination.