When you hear the word “subprime” you probably cringe as the media made it out to seem like subprime mortgages were the number one reason for the mortgage crisis. It is true that they did play a part, but they were not the only reason. Because of that, lenders have come up with a better way to offer these loans and they even give them a different name. Today they are called “non-qualified mortgages.” In essence, they are the same thing under a different name with a few new regulations to help avoid another mortgage crisis, but still help those that do not qualify for standard financing. There are three distinct ways that this mortgage program is different today; understanding them can help you figure out which program is right for you.
You Have to Meet the Ability to Repay Rules
A new rule that came about a few years ago is the Ability to Repay Rule. This rule requires that the lender determines that every borrower is able to repay the loan. This can be done in a variety of ways – there is not one way that must be used. This means that lenders can choose their own method of verification; they just have to be able to prove that they did it. This could look like any of the following:
- Evaluating bank statements rather than paystubs or W-2s if you have alternative types of income.
- Providing different types of credit if your credit report does not have enough trade lines reporting. This could include things like utility, insurance, or rental payments.
The lender decides how they will determine your ability to repay the loan. As long as they can prove that they did their due diligence according to their guidelines, the loan can go through without legal consequences. This was a part of the problem of subprime loans in the past, as there were not any requirements regarding what needed to be evaluated, so lenders were providing funds to borrowers that never truly showed their income or assets in a standard or alternative manner.
Subprime Lenders Portfolio Lend
The first largest difference is the fact that lenders portfolio lend rather than sell your mortgage off to a third party. This means several things for you:
- There are no investor overlays because the lender is funding the loan
- Lenders might be a little pickier about who they lend to because they are keeping the loan on their own books
- You might have to shop around with different lenders to find one that offers the specific type of program you need, such as stated income or stated asset
Lenders are choosing to take the loans on themselves because the new regulations make it impossible for them to sell them on the market. This helps to build up the portfolio of certain lenders, though and many lenders seek these types of borrowers out. Because the only rules you have to abide by are the federal guidelines (the Ability to Repay Rules) and the rules the lender creates, you may have an easier time qualifying when you are matched up with the right lender.
You Have More Options
It might seem like the mortgage industry is greatly reduced and has tighter restrictions today, but in all honesty, there are many more subprime mortgage options available today. This mostly due to the fact that investors are not buying the mortgages, so the lenders are in charge. The banks that decided to go all in and offer alternative documentation loans are looking for borrowers that do not qualify under the Qualified Mortgage Guidelines. These are the borrowers that might not have the income reporting on paper that they actually make, so their debt ratio looks much higher than it is, kicking them out of the realm of the QM guidelines. As long as you have compensating factors to make up for the lack of income reporting that you have, many lenders will welcome you with open arms.
The key is that you have to shop around, though. You cannot just call up your local large bank and assume they will give you a Bank Statement Loan or even a Stated Income Loan. Typically, the smaller lenders are the banks that portfolio lend and work with each borrower individually. These lenders will go over your file with a fine toothed comb and help you see where you have qualifying factors. If they see potential, they will help you learn what you need to provide for documentation in order for them to meet the Ability to Repay Rules.
Just because subprime loans are different today does not mean that they are not just as beneficial as they were in the past. Actually, they are safer today because lenders are more careful and take more time ensuring that you can afford the loan not only now, but down the road as well. If you are self-employed, work on commission or bonus, or have any other type of irregular income, looking into alternative documentation loans could be the best option for you.