The Non QM of it all
I’ve been working on a fair amount of non-QM (non-qualified mortgage) loans the last 4-months. Non-QM financing is what I’d consider a new/responsible alternative mortgage option for mortgage requests which don’t fit “in the box”. I wouldn’t go so far as to call it the new “subprime”. I brokered my fair share of subprime mortgages from 2002 to 2005 & today’s non-QM financing doesn’t look anything like pre-2008 subprime.
A non-qualifying, or non-QM, loan doesn't meet the Consumer Financial Protection Bureau's requirements for qualified mortgages.
These mortgages can help those in unique financial situations or poor credit histories get into a home..
They are typically more costly than traditional mortgages and will accompany a higher risk.
When it Works
Lately, with the interest rate spikes and property values correcting, more and more purchase agreements are being cancelled. It’s affecting how the entire market behaves & lenders are shifting their risk appetites accordingly. Thanks to having twenty plus years in the residential mortgage business, this is how to navigate when the market shifts and turns in unconventional ways…Get unconventional solutions!
One Pivot Opportunity:
If borrowers have significant equity in their home & want to pull money out for a giant remodel project, or to help their businesses expand, they could be limited on the amount they can borrow from their home (due to maximum cash-out limitations). For business owners who’ve started new businesses &/or are in the start-up mode their financial documentation may show extreme losses due to office expenses and start-up costs. They may have sizable capital layout for stocking the shelves, hiring new employees, etc. which are all completely normal & typical for a start-up. From a tax return standpoint, however, borrowers may not qualify for a traditional mortgage due to these tax losses. This is especially true once we factor in the income losses that could have incurred from COVID-19, receiving PPP money (which is a non-annually recurring event), etc.
When you can’t predict the future, it can be tough to use historical financials when the history is too new or too dynamic.
Also, When pulling equity out of your home for a jumbo mortgage the amount of cash-out you can receive is typically limited to 70% of current appraised value (or less). In the non-QM arena there are lenders who will allow up to 80% cash out using current appraised value.
Anecdote: I was able to use 12-months of business bank statements from a similar borrowers’ existing profitable business (disregard the other separate businesses financials), average the income & use this for qualifying purposes. They were able to pull the maximum amount of equity from their home without having to produce an inordinate amount of documentation. The mortgage doesn’t have a prepayment penalty, so when interest rates correct themselves and the financial package fits into the “normal” underwriting criteria we can revisit better terms through a refinance.
Here’s Another Use Case:
Imagine a borrower who has started developing commercial property in addition to their day job starting in 2019. They have been purchasing land, getting construction financing & developing new office buildings on these parcels. From a tax return standpoint this situation equates to an inordinate amount of expenses & significant losses with zero corresponding income (since the property is under construction). This is normal for these situations. Interest reserves are built into the construction financing, so the borrower is in a good place financially, but on a tax basis it looks pretty ugly.
When using traditional residential underwriting the borrower wouldn’t qualify since the losses from the developments are significantly more than the borrower’s normal sources of income, so on paper the borrower makes no money for qualifying purposes.
The borrower wanted to purchase a rental property which was vacant & in desperate need of repair, put it into their LLC & rent it out at a later time. There are non-QM lenders who will use only the prospective rental income the appraiser deems pertinent for qualifying, ie. no tax returns required. Since this particular property was vacant, I didn’t have to wait for a tenant/rental agreement. Because the borrower had decent credit it didn’t matter what the rental income was – it was the fact there was potential rental income we could close escrow.
Business Investing Keep-In-Minds
Being able to take title LLC aspect is super-interesting. Fannie Mae-Freddie Mac (ie. conventional mortgage financing) won’t allow LLC vesting - only personal vesting or vesting which is in a Revocable Trust- since LLC vesting can imply a business operation vs. consumer/personal financing. Being able to offer an LLC option for the legal protection it can afford is a great tool to have access to.
If any of these options sound appealing to you, Reach out and let’s see what we can come up with!