It is well-acknowledged that location is crucial when buying real estate. Similarly to that, adaptability might be equally important to the mortgage sector. Finding that flexibility, however, has been challenging for a long time because strict lending requirements and regulations have dominated originations, limiting the pool of "eligible" applicants and fueling demand for loan products that can accommodate borrowers who don't fit these criteria. The non-QM lending market is expanding, and it can benefit both originators looking to expand their operations and borrowers who have been passed over by traditional lenders. What makes the market require non-QM loans, though? Who are the non-QM borrowers of today? What do they require from a lender, then?

The Access to Credit Remains Limited

Since the housing crisis of 2007, the availability of mortgage loans has remained the same. Many lenders have been exceedingly risk-averse and have stuck to qualifying mortgage originations as defined by the government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, in addition to the rules placed in place to safeguard customers. Despite other signs of creditworthiness, this has prevented a sizable portion of the population from obtaining credit. The Qualified Mortgage Rule itself and many lenders' reluctance to originate loans outside of those constrained boundaries are at the core of the problem. The Consumer Financial Protection Bureau (CFPB) determines what qualifies as a mortgage as part of the requirements that must be satisfied for a mortgage to be backed or purchased by government loan programs or by the GSEs. The ability-to-repay rule must currently be met, and loans must have maturities of no more than 30 years and be completely amortizing. In addition, the monthly debt-to-income (DTI) ratio of the borrower can be at most 43%, and the total of points and fees can be at most 3% of the loan amount (with the exception of loans under $100,000).

Non-QM Loans Borrowers: Who Are They?

The challenge with the non-QM borrower as a subset of the market stems in part from how diverse those who fit the description might be, ranging from investors to self-employed individuals, from foreigners to gig economy workers. It's a common misperception that non-QM borrowers have poor or low credit ratings. Even though some non-QM loan borrowers could have credit problems, many of them have excellent credit and are otherwise very qualified borrowers; they only need to provide additional supporting documentation or utilize a different method to determine their income in order to qualify.

Investors make up a sizable portion of the industry, especially novice investors who might need more business or credit background to be eligible for a more traditional product. So, how would one describe a non-QM borrower? Despite the fact that there are few straightforward profiles to present, applicants may frequently require other documentation, such as bank statements, to demonstrate how they have calculated their income.

However, non-QM loan customers typically have very strong credit histories, with average FICO scores between 720 and 740 and loan-to-value ratios (LTVs) of 70% or less.

However, how do mortgage brokers like Gustan Cho Associates locate a lender who can accommodate the demands of these creditworthy borrowers?

Selecting the Best Lender

Finding a lender that offers non-QM products is the first step in satisfying the demands of any non-QM borrower, and this, like practically everything else, was negatively impacted by the epidemic. But as the market expands and recovers, more and more lenders are entering the market. Thus originators must look for what sets one non-QM lender apart from another.

Although traditional lending continues to make up the majority of originations, originators should think about expanding their customer base to non-QM customers. These borrowers are frequently objectively creditworthy; they need a little more in-depth examination of their financial condition than can be accomplished by checking boxes in a computerized system. The need for mortgages to fulfill their needs will increase as more and more entrepreneurial Americans become freelance or succeed in the gig economy. Finding and collaborating with lenders with non-QM experience will result in more closed loans and happier borrowers.