Written By: Glenn Michaels, Op-Ed Writer
The government forced lenders to offer and grant Qualified Mortgages (QM) which eliminated what was called ‘subprime” mortgages. The QM mortgage applies strictly to the conforming loan amount.
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Lenders have found a loophole in the law and are offering non – qualified mortgages (NQM) to borrowers that require jumbo mortgage financing and loans for borrowers with investment properties regardless of the loan amount.
In my office I have numerous program high lights for jumbo loans with all kind of high ratio qualifications. Some of the programs allow the debt – to – income to go to 49% and they are called NQM.
Borrowers that are in need of a true subprime loan are asked to form a corporation and then they can finance the property as an investment property. Borrowers in this case are usually asked to put more down, 30% - 40%, in order to obtain more liberal underwriting. Borrowers that put 30% to 40% down have more risk or more skin in the deal and are less likely to default as they a lot to lose.
Borrowers that can obtain these loans generally pay a higher mortgage rate than those that can obtain a QM loan. They also must put a higher about down and often have to pay more points and fees to obtain the mortgage loan.
A number of self – employed borrowers have purchased their homes this way as they were unable to qualify under the QM rules and regulations, other borrowers with low credit scores or with recent severe credit issues have also gone this route to buy their dream home.
There are FHA lenders that will originate and close a loan file where the borrower credit score is at least 500. In some respects the FHA fills the void for the subprime mortgage lender.
FHA allows a borrower with a decision score of 500 – 579 obtain a home using FHA financing with ten (10) percent down and all other FHA rules and regulations apply. Most borrowers with lower credit scores now must under the Manual Underwriting Mortgagee Letter (ML) 2014 – 02. ML – 2014 – 02 spells out the rules and regulations for a manual underwritten loan file.
Loans that are underwritten manually must show that they have a favorable rental rating for the most recent two years and also submit the two most recent IRS tax forms with all schedules. Borrowers approved using an automated underwriting system (AUS) with the Total Scorecard does not have to verify previous rental payments or reveal their current house payment. The qualifying ratios are more liberal than those manually underwritten including the amount and types of compensating factors.
Loans manually underwritten are limited to 40% housing to income (HTI) and 50% debt to income (DTI). In addition there must be 3 – 5 compensating factors as well to do the loan with the ratios above the suggested ratios.
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Borrowers that are approved by an AUS with Total are often approved with ratios of 45% and 55% DTI. It is always prudent to give some compensating factors for approving a loan above 31% HTI and 43% DTI.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
