The Fate of Non-QM
Written by: Jamie Miller, Creative Marketing Manager; First National Bank of America
Non-QM lending will not disappear contrary to what some are saying.
While the Non-QM industry may see lending done a little differently by some in the space, it’s definitely not going anywhere! Let’s talk about the different types of mortgages available and break down the reasoning behind why some are saying that Non-QM and Jumbo loans will disappear.
We have Traditional mortgages, Non-QM loans and Jumbo loans. All 3 have people, financing and houses in common. They all have LTV, DTI, credit and ability to repay requirements. These requirements vary by lender with LTV’s ranging from 95% to 65% depending on compensating factors and credit and DTI’s ranging from 43% all the way up to 55%. Traditional mortgages usually provide mortgage approvals based on tax returns where Non-QM and some Jumbo loans allow alternative income documentation options which can paint a much more accurate picture of a borrower’s ability to repay especially for business owners and self-employed individuals. With all of these common characteristics, there is one major difference, Traditional mortgages are government backed by Government Sponsored Enterprises (GSE’s), Non-QM and Jumbo are not.
What exactly does that mean? The loan servicer is required to pay the investors each month regardless of whether the borrower pays them. So, GSE’s provide a guarantee of payment for loan servicers if the borrower doesn’t pay, making traditional loans more attractive as they pose a much smaller risk to the servicer. Non-QM and Jumbo loans do not offer that safety cushion to servicers meaning that if a borrower doesn’t pay their mortgage, they don’t get paid but they still have to pay the investors which could pose a substantial risk to the financial stability of the servicer. It is a trickle down affect really. The investor is not willing to take the risk that the servicer will be able to make payments in the case of a default, so they are not as willing to purchase a mortgage pool with loans not backed by the government. Because the investors’ appetite is not there, the servicer is not willing to purchase these types of loans from the lender. If the lender cannot sell them, they will not originate them.
When looking at all types of mortgages, government backed or not, the lender analyzes the borrowers risk and makes a decision to extend financing or not. Remember, they all have people, financing and houses in common. People, regardless of what type of mortgage they have, all depend on something for income. If the source for income goes away, their ability to repay also goes away. So you see, it doesn’t matter what type of mortgage someone has, the initial risk is the exact same.
Why is Non-QM lending not going to disappear?
The Traditional, Fannie/Freddie/Ginnie mortgages will continue to not have an appetite for certain types of borrowers. Self-employed borrowers, clients with only an ITIN and individuals who have experienced recent negative financial events or have a light credit history will still be searching for financing options to get into a new home, a dream home, a retirement house and everything in between! That is where Non-QM loans comes in. It will fill the financing void for millions of qualified, good credit, adequate income families.
At First National Bank of America, we believe in the Non-QM industry and the people it serves.
FNBA has an advantage over other Non-QM lenders. That advantage comes from the fact that we are a portfolio lender with over 60 years of lending experience. We service all of the loans we originate, meaning we don’t have to rely on investors or servicers to fund and purchase our loans. It means that we have the ability to set our own guidelines and risk tolerances for both Non-QM and Jumbo loans.
What does that mean for you and your clients? It means that we will continue to offer our mortgage solutions as we have since 1955, with the same requirements you have come to know us for! Our LTV’s remain, we will continue to allow up to 55% DTI and our Alternative Income doc options and minimum credit criteria will be un-waivered.
Together, we can help families finance A Different Way Home!