Mortgages for Typically Ineligible Buyers: Non-QM Loans

  • During the pandemic, the demand for mortgages has soared.
  • This also applies to the number of self-employed persons, a group that often has difficulty qualifying for a mortgage.
  • As a result, unconventional mortgages are gaining momentum while other mortgages plummet.

The number of Americans struggling to get a mortgage is on the rise, and a group of niche lenders are cashing in on money to help.

Sprout Mortgage, Angel Oak, Carrington and Athas Capital Group are four of the lenders promising to help borrowers without a W-2. They offer competitive prices and say they help those on their way to restoring their credit.

Their specialty is aimed at investors and everyday borrowers who failed to qualify for the rigorous underwriting standards that followed the 2008 housing crisis, as well as the self-employed. After the subprime mortgage crisis, they have been embraced by some, but have not played a major role in US home financing.

With the rest of the mortgage industry shrinking, these lenders are doing better than ever by targeting borrowers who were outcasts because of low credit scores, high debt or their status as unsalaried employees. The loans from these lenders differ from conventional mortgages in that they are not guaranteed by the US government or the financial institutions Fannie Mae and Freddie Mac – which have stricter underwriting guidelines – and they do not meet the definition of a ‘qualified gold standard’. mortgage” established by the Consumer Financial Protection Bureau.

The pool of borrowers of these “non-QM” loans can be large, with about 8% of mortgage applications rejected each year, according to mortgage issuer HSH. In another study, personal finance firm NerdWallet found that while loans processed by lenders rose 10% in 2020 from 2019, there were about 58,000 more denials.

As for the self-employed, Pew Research found last year that there were about 16 million of those employees.

“Since the start of the pandemic, there have been more self-employed entrepreneurs and their needs are not easily met by traditional loans,” said Sam Bjelac, executive vice president at Sprout Mortgage.

Sprout Mortgage is a lender run by Michael Strauss, the former head of American Home Mortgage, one of several subprime lenders that went bankrupt in the late 2000s. More regular borrowers are also finding they don’t fit in the standard mortgage box, Bjelac said.

So as the mortgage market intensifies its focus on these underserved workers, the non-QM market is expanding. By the end of the year, some experts predict that the non-QM market will quadruple to $100 billion.

Angel Oak Mortgage Solutions, another non-QM lender, predicted its origins would rise from $3.9 billion in 2021 to $7.5 billion this year. as they were when the company saw the need and jumped into the non-QM business nearly a decade ago, said Tom Hutchens, an executive vice president at Angel Oak.

By contrast, conventional lenders struggle to downsize as rising mortgage rates put a strain on their business. The Mortgage Bankers Association predicted that total mortgage production in the US was likely to fall 40% this year to $6.8 trillion, with most of that decline due to the decline in refinancing.

Non-QMs are ‘more of an art’

What the conventional mortgage market lacks is helping the non-QM lenders, whose borrowers are less sensitive to interest rate movements because there are few alternatives. Brokers who have been bustling with easier-to-close loan refinancing in recent years are suddenly eager to help borrowers who are having a harder time qualifying for loans, including those who can take advantage of non-QM products. , Brian O’Shaughnessy, said the co-CEO of Athas Capital Group.

When granting a loan to non-QM borrowers or investors, lenders such as Angel Oak and Athas are willing to consider a wider variety of financial information than lenders selling their origin to Fannie Mae or Freddie Mac. For example, Fannie Mae strictly limits the number of properties it finances for an investor, but Angel Oak takes a different approach.

“If the cash flow from the investment properties will cover their mortgage, taxes and insurance, and they have a…


good credit

score and probably a history as a real estate investor, then we think this is a good loan to make,” said Hutchens.

“It’s really more of an art and specialty in the non-QM,” said Greg Austin, executive vice president at the California firm Carrington Mortgage Services, another non-QM lender with ties to the pre-subprime industry. crisis.

Carrington works — as is common with non-QM lenders — with independent borrowers to analyze bank statements, profit and loss statements, or 1099s to determine their eligibility for a loan. Some investors even keep traditional jobs so their W-2 can save them a headache.

“As a self-employed person, it’s so much harder to get a loan,” Ryan Chaw, a real estate investor, told Insider.

Non-QMs are a ‘last resort’

Rashad Tillman, a California resident, said non-QM loans were ultimately both a lifeline and a “last resort.” Since he started looking for homes in early 2020, the 31-year-old father of three – soon to be four – said he faced obstacles almost every time.

First, he said that a total of four brokers and four loan officers did not want to work with him because of his unique income stream.

“When it comes to the self-employed, they’re like, ‘Well, that takes too much time and that’s too much effort.'” he told Insider.

Tillman’s financial picture is complicated. He is a full-time manager at a used car dealership, but also earns income from his small businesses. Because of the way Tillman structures his amortizations, the highest mortgage he qualified for using traditional methods was $400,000, although he was confident he could afford more.

“I can’t look at a cabin here in California for $400,000,” he said.

Tillman said he learned of non-QM loans through a Facebook ad touting “bank statement loans,” which are approved based on the deposits shown in a bank account rather than a W-2. He filled out the attached survey, but that lender would only look at 50% of what he had deposited in his business bank account.

He kept looking until he found New American Funding, which he said offered him a non-QM loan that valued 100% of his income.

His journey did not end there. Two housing companies would not accept non-QM loans. It wasn’t until October, after nearly 10 months of searching and almost giving up, that he found a sympathetic homebuilder in Riverside County, California, about 90 minutes from Los Angeles.

He was able to purchase a three-bedroom, two-bathroom house still under construction for $640,000 that has the yard of his dreams. That wouldn’t have been possible without the alternative mortgage, he said.

“It allowed me to finally qualify for a house that I can afford, in a safer area, that my wife would want, and where the kids can feel comfortable,” he said.

One drawback to non-QM mortgages is that interest rates are higher than conventional loans, in part because they are sold and packaged in mortgage-backed securities that don’t carry the payment guarantees of bonds issued by Fannie Mae, Freddie Mac, or Ginnie. mae. Since the beginning of the year, rates on all mortgages have risen, although Tillman still pays about 7%, or 2 percentage points more than a conventional loan.

The rate is just part of the cost of having his own businesses, Tillman said.

“Anyway, that money was going to go somewhere,” he said. “Do I want to throw it to the IRS? Or do I throw it to my


deposit

on a house?”

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