The LO Down - Non-QM Loans

With interest rates at all-time highs and looking to stay there for a while, lenders are having to think outside of the box in order to prospect leads and stay in business.  Yes, house prices are coming down, but are not expected to decrease fast enough to counter the high rates that are making affordability nearly impossible for many looking to buy right now.  

Enter - the Non-QM or Non-Qualified Mortgage product. These are loans that fall outside of that safety bubble of the standard Fannie/Freddie guidelines.  But, if you think about it, that actually includes a lot of products like certain ARMS, Construction, and Home Equity Loans, just to name a few.  

However, there are some relatively new products entering the scene, like 40-year mortgages.  These are more on the portfolio side of lending because they aren’t sold to Fannie or Freddie and instead are typically serviced by the primary lender.  

So, why offer 40-year terms?  The reasoning behind this new option seems to come from the fact that most borrowers nowadays aren’t staying in their homes for more than 5-7 years. At that time, either the size of their family or their financial situation has changed, making the move to a new house make sense.  Since the loan will most likely be a short-term thing, why not give homeowners a longer term so their monthly payments are a bit more affordable? Like this:

$400,000 @ 6% interest over 30 years = $2,398 /mo (principal and interest)

OR

$400,000 @ 6% interest over 40 years = $2,200 /mo (principal and interest)

Sure, the savings per month are just under $200, but for borrowers on a tight budget that are eager to get into a home, that $200 can make a big difference. 

Another option we are seeing from just a few lenders is a 40-year mortgage coupled with a 10-year interest-only period at the beginning of the loan.  This particular product is currently only offered on certain Jumbo loans - basically loans that are above the conforming loan limit.

With the announcement of this particular product, critics have been more than happy to share the similarities with products offered back in 2007 that led up to the crash. But, the underwriting guidelines on the Non-QM loans of today are nothing like they were back then, and instead are more comparable to traditional conventional products.  And, in some cases, they can be even more conservative in order to meet investor requirements as a “safe” loan.  

While we here at the Knowledge Coop will stay out of this particular debate, we are interested in waiting to see if products like these can offer a safe and secure way to provide relief to borrowers in need.  That’s all for us. Thanks for reading, and for more content like this, check out trythecoop.com.