Not everyone who can afford to buy a home qualifies for a traditional mortgage. Fortunately, there are alternative ways to own a home, one of which involves looking at what unconventional mortgage lenders have to offer. Depending on whether you meet the required eligibility criteria, getting a USDA loan or a VA loan might also work in your favor.
Typically referred to as private mortgage lenders, nonbank mortgage lenders offer financial products that are largely similar to what you’d find through traditional banking institutions. These include loans for first-time homebuyers, second home/investment loans, jumbo loans, reverse mortgages, as well as refinancing solutions. However, since alternative mortgage lenders don’t have to follow the same stringent regulations as banks, they are able to make way for relaxed eligibility criteria, lower down payments, and quicker processing of applications. Unlike banks, private lenders cannot offer deposit services.
First-time homebuyers who do not meet the typically stringent eligibility criteria that come with traditional mortgages as well as investors who are looking for flexible solutions may turn to mortgage alternatives made available by nonbank mortgage lenders. While such alternatives give you the ability to bring down your monthly payments, you also stand the chance to qualify for higher loan amounts than you would through a traditional mortgage.
You may refer to any mortgage that deviates from traditional mortgage practices as an alternative mortgage. The variation may come in the form of an adjustable rate or more relaxed income/creditworthiness requirements.
Non-qualified mortgages (non-QMs) refer to home loans that do not fall under the qualified mortgage (QM) bracket. Lenders that offer QMs need to determine if borrowers meet the requirements laid out in the ability-to-repay rule. In addition, lenders cannot offer features such as interest-only payments, loan terms of over 30 years, and balloon payments through QMs.
The non-QM market finds favor with people who have less-than-perfect credit as well as with those who cannot qualify for traditional mortgages or QMs for any other reason. Non-QMs, in their basic form, are designed as solutions for individuals who cannot meet the stringent eligibility requirements that come with traditional mortgages. For example, you might qualify for a non-QM as a foreign national or as an investor with fair credit.
One way to determine if you need to look at alternative or non-qualified mortgages is to check if you qualify for a traditional mortgage. General eligibility criteria for qualified mortgages include providing proof of income through paystubs, tax returns, and W-2s, as well as having a debt-to-income ratio of no more than 43%. In addition, fees and points cannot be more than 3% of the amount you borrow.
Given the stringent guidelines that accompany QMs, providers of such loans receive considerable protection from liability by being backed by some government entities such as Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). Non-QMs, on the other hand, don’t provide lenders with any such safeguard.
Data released by CoreLogic suggests that the main reasons why non-QMs from 2018 did not fit the QM bracket were:
More than 45% of non-QM borrowers had DTIs of over 43%, and over 40% presented alternative or limited documentation. While the share of non-QMs issued to borrowers with DTIs over 43% has increased significantly over the last few years, there has been a phasing out of risky factors such as balloon payments and negative amortization.
The non-QMs of today have evolved considerably over the last decade and are not quite the same as they were before the financial crisis of 2007-2008. Consider this – the average credit score of non-QM borrowers in 2018 stood at 760. This number for homebuyers with QMs was a tad lower, at 754. In addition, the average first-lien loan-to-value ratio for non-QM borrowers was 79%, whereas it was 81% for QM borrowers.
Determining if a non-qualified mortgage might work well for you requires that you pay attention to the benefits as well as the possible downsides.
People who don’t have lengthy enough credit histories, those who have fair/average creditworthiness, foreign nationals with no credit scores, and even those looking for larger-than-usual loan amounts get several mortgage alternatives from which to choose. Selecting the option that works best for you requires paying close attention to different factors, including your own requirements.
A home renovation loan gives you the ability to buy a fixer-upper home and have adequate funds to carry out required repairs and renovations.
Although both the loans in question are backed by government bodies, they come with features that you would not find in a traditional mortgage. For instance, you may get either without needing to make a down payment.
Meadowbrook Financial Mortgage Bankers realizes that borrowers looking at what the non-QM market has to offer don’t have many options from which to choose. To fill this relative void, it offers four distinct products.
The Credit Ascent loan program is designed to meet the needs of individuals with fair/average credit who’re looking for responsible lending solutions.
The Prime Ascent loan program is meant for qualified individuals who’re looking for larger-than-usual loan amounts.
As the name implies, the Investor Solutions loan program is for investors who’re looking for alternative sources of funding.
You may consider taking a look at what this loan program has to offer if you’re a foreign national who wishes to purchase a home or refinance an existing mortgage in the U.S.
Jumbo loans fall outside the bracket of traditional mortgages for one simple reason. They come with loan amounts that exceed conforming loan limits (CLLs) set forth by the Federal Housing Finance Agency (FHFA). As per data released by the agency, the CLL for single unit properties is set to be $647,200 in 2022. With jumbo loans, qualified borrowers may get mortgages of up to three million dollars.
Given that the amount involved in a jumbo loan is typically a large sum, you may expect to find more stringent lending criteria than compared with other alternative forms of lending.
Data indicates that the non-QM market closed at around $18.9 billion in 2020, although it is pegged to get to $200 to $300 billion per year in not too distant a future. The projected growth is mainly because an increasing number of prospective homebuyers are unable to qualify for traditional mortgages. The three main segments that stand to gain from non-QMs include:
In an ideal world, there should be no stopping you from getting a traditional mortgage if you have the ability to repay. You would then get the same loan terms and interest rates as your peers who check all the QM boxes. However, not everyone who wishes to and can afford to buy a home qualifies for a traditional mortgage. What helps is that there are a number of alternatives to traditional mortgages, several of which come in the form of non-QMs. These aim to help borrowers with unconventional or unique circumstances.
If you’re unsure about which type of mortgage might work best for you, getting in touch with a reliable lender that provides alternative solutions might be in your best interest.
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