When it comes to non-qualified mortgage (non-QM) loans — those that fall short of the requirements to be purchased by Fannie Mae or Freddie Mac — the mortgage industry has crossed a threshold. Mortgage brokers and loan officers who have never previously offered non-QM products are starting to do so.
A changing business environment has fueled their interest. The mortgage industry is facing a perfect storm. First, refinances that sustained originators for so long are expected to decline by 69% this year compared to 2021, according to a Mortgage Bankers Association forecast from June 2022. Now they need to compensate with more home-purchase originations.
Meanwhile, interest rates for 30-year fixed loans reached their highest levels in 13 years and inventory remains tight. An April 2022 Realtor.com report noted that for every five homes available for sale when the COVID-19 pandemic started, there are now only two. Homebuyers, who may feel this is their last chance to secure the home they want, need originators who can help them find financing fast.
These prospective buyers include large pools of potential candidates who may not qualify for a traditional mortgage. Often, however, they are excellent prospects for non-QM products — assuming that a mortgage broker or loan officer has the expertise to provide them. For example:
- There are 16 million self-employed individuals in the U.S., according to the Pew Research Center. These people may not have the employment documentation required for a traditional mortgage, but they may have alternative documentation to qualify for a non-QM loan.
- Investors are buying up homes for rental or fix-and-flip purposes. These buyers are typically candidates for debt-service-coverage ratio (DSCR) loans, a subset of non-QM. Redfin noted that 18.4% of all U.S. homes sold in fourth-quarter 2021 were bought by investors, compared to 12.6% a year earlier.
- Many high net worth individuals routinely purchase and sell homes to rebalance their portfolios of assets. Non-QM loans that offer higher amounts than agency-backed mortgages provide them with the liquidity to do so.
- About 8% of all mortgage applications are declined at any given time. These prospects fall out of the manufacturing line for various reasons, but this doesn’t necessarily mean they’re not creditworthy. If an originator has already put time and money into these leads, they may have the ability to help close a sale by using a non-QM option.
There is opportunity in this segment, but that doesn’t always equate to easy access. Non-QM mortgages are not commodities. Matching the right borrowers with the right products requires specialized training and knowledge. Originators can pursue this training and knowledge to master the non-QM segment and become the go-to experts in their locality.
Successful non-QM lending is not a reactive process — it is more of a proactive, deliberate and “by design” approach. The more knowledgeable an originator is regarding the nuances of non-QM lending, the better equipped they will be to evaluate each loan scenario and recommend the appropriate product.
If an originator is looking to capture more business-purpose investor clients, then they’ll need to strengthen their knowledge of DSCR products. This includes what kinds of properties qualify; how to determine whether a client’s property income and cash flow will be sufficient; maximum loan amounts and loan-to-value ratios; downpayment and reserve requirements; credit scores; cash-out options and more.
If they want to serve “well-heeled” borrowers who are seeking a mortgage for a primary residence, originators will require education on a variety of non-QM product options (including 40-year mortgages and interest-only loans). They’ll need to know the flexibility for terms such as debt-to-income ratios along with the data and documentation that underwriters will require (from bank statements to 1099 forms). If they seek a niche that supports borrowers recovering from recent credit events, they’ll need to understand the eligibility criteria that must be met.
Technology and resources
Imagine that a potential borrower is on the phone with a mortgage broker, having just been turned down for a traditional mortgage after leaving a job to start a consulting business. The client has his eye on a $1.5 million home to be used as a primary residence and has enough savings for a 20% downpayment and monthly payments of up to $8,000 for a year. But he really wants to conserve this cash for his new business venture and would like a non-QM loan.
A broker who has recently started to provide non-QM products may not know which type of loan this prospect may qualify for. What is the maximum loan amount? Can the broker offer the buyer the choice of a fixed-rate or an adjustable-rate mortgage? What documentation will the borrower need to provide and how much money will they be required to hold in reserve?
These are the kinds of situations where technology can be valuable. For example, wholesale non-QM lenders publish complimentary online tools, such as Quick Qualifiers, to help originators advise prospects at the point of inquiry.
From there, lenders help their channel partners with loan structuring and pricing, analysis of bank statements and other documentation, appraisal reviews, credit grading, and responses to general non-QM questions. If they have in-house underwriters, they can advise on whether exceptions can be made based on compensating factors, such as large amounts of reserves or high credit scores.
Look to lenders
Wholesale lenders that live and breathe non-QM products are eager to train their lending partners. The information they pass along can include products, sourcing, best practices, loan submission and structuring processes, alternative methods for income calculation and more.
Lenders understand that this not only gives partners a competitive advantage with prospects, it also empowers these originators to educate their own referral partners — from financial advisors to Realtors — on the non-QM segment so that they can assist a wider range of homebuyers. At the end of the day, this dedicated approach to specializing in non-QM products (whether for a purchase today or for a refinance down the line) can help originators expand their base of high-quality borrowers.
Borrowers, too, want to make an educated decision, and they often choose their originator based on their confidence in the originator’s product knowledge. To capture borrowers’ attention and loyalty, originators must develop a new level of non-QM mastery. ●