Subprime mortgages seem to have gone by the wayside with the downfall the industry took, but if you look closely today, they are still available, they just have an entirely new look. Will you hear the word “subprime” being thrown around by banks? You probably won’t. But, what you will hear is the word “non-qualified mortgages.” These are the loans you should be after if you are not qualified to receive a conventional or FHA loan as these loans offer plenty of potential and the ability to make you a homeowner without the restrictions that standard loans have today.
What is a Non-Qualified Mortgage?
A non-qualified mortgage is the old category that subprime mortgages fell under. They are loans that do not fall under the new Qualified Mortgage rules, which would mean they do not meet one of the following:
- A debt ratio lower than 43 percent on the back-end
- Fees that do not exceed 3 percent of the loan
- Income that can be verified by a third party
- Loan terms that are 30 years or less
- No unique amortization features
If you do not meet one of these requirements whether because the lender considers your loan file risky and needs to charge more to make up for that risk; your income is not easily verified because you work on commission or self-employment; or you have a higher than average debt ratio, then you fall under the non-qualified mortgage guidelines. Your loan does not qualify for the QM rules, which basically protects lenders against any legal action from being taken against them if a borrower were to lose their home due to being unable to afford it. Being a non-qualified borrower means that the lender is not protected, but it does not mean they cannot offer you a loan.
You Have to be Able to Pay
The one thing that any loan has in common, whether we are talking about subprime mortgages, non-QM mortgages, or QM mortgages is the Ability to Repay. This is yet another guideline that was put into place after the mortgage crisis. What it states is that the lender has to do its due diligence in determining that every borrower can, in fact, afford the loan. What this means is the days of the following loans are gone:
- Stated Income, Verified Asset
- Stated Income, Stated Asset
- NINA, No Income No Asset
You have to be able to verify everything in the method that the lender deems acceptable. This means you must have a method to prove your income. This could mean that you provide bank statements rather than paystubs, for example, if you are self-employed. Or it could mean that you provide alternative forms of credit if you do not have an adequate credit score, such as utility bills, insurance bills, or rent payments. The lender is in control regarding how they determine your ability to repay the loan, but they must be able to prove that they evaluated your case very carefully to ensure your ability to afford it.
The Difference in Subprime Mortgages and Non-Qualified Mortgages
Subprime mortgages were often sold on the secondary market – it was part of the reason that the market took such a hit when everything fell apart. Today, non-Qualified mortgages are not sold on the secondary market; in general, the lender keeps them in their portfolio. This gives them the flexibility to supply almost any type of loan to borrowers that they see fit – they are not governed by any regulations with the exception of the Ability to Repay Rule, which every loan whether sold or not on the secondary market, must meet. What this means is that there are no programs across the board that you will find at every lender – you might find a stated income loan at one lender that allows you to use bank statements for your proof of income while another lender might offer a stated asset loan where you state your assets based on the money left over from your income on a monthly basis.
If you are looking for something similar to subprime mortgages, look for lenders that offer non-Qualified mortgages. There are more and more lenders that are diversifying their offerings today in order to make their portfolios larger and their profits better. As long as your credit is decent and you have ways to provide the proof the lender needs that might not meet with conventional guidelines, you should have an easy time finding a loan that will fit your unique situation.