There is a growing number of non-QM loans out there. In fact, a quick Google search for non-QM loans yielded 1.2 million results. What’s behind the growth of these loan products?
What non-QM loans are – and what they’re not
In 2014, the Consumer Financial Protection Bureau put into action the Ability to Repay and Qualified Mortgage (QM) Rules. Basically, if a lender follows the eight standards defined in the QM Rules, “they have less fear of buybacks, lawsuits and financial loss” if a loan defaults.
As the name implies, “non-QM loans” are loans that do not comply with the QM rules. Non-QM loans were created by some lenders to offer loans that other financial institutions would not originate, but they lack liability protection, and the secondary market for these loans is less liquid. However, non-QM loans are not necessarily high-risk. They are just loans that don’t adhere to the complex rules associated with QM.
For example, you could have a borrower with a high FICO score but they might have a DTI higher than 43% which would disqualify the person for QM loan. A good example of someone who might fall into this category is a recent medical school graduate – he or she would likely have solid credit and higher than average income, but may have a high DTI ratio because of student loans. Despite their very bright financial future, they might not qualify for a traditional mortgage.
Assessing a borrower’s Ability to Repay – Credit Plus can assist
Even though non-QM loans don’t follow QM rules, it is still important for lenders to analyze and document a borrower’s Ability to Repay. Credit Plus can assist you with verifying:
- Income and employment with employment verifications through the Work Number®, a solution offered through Equifax Workforce Solutions*, and the largest collection of payroll records contributed directly from employers.
- Income and assets with 4506-T/Tax Return Verifications.
- An applicant’s savings and checking account information through AccountChekTM Asset Report.
- Undisclosed debts with Undisclosed Debt Verifications.
For more information about how to comply with the Ability to Repay rule visit https://creditplus.com/knowledge-hub/blogs/getting-into-non-agency-lending-ensure-the-ability-to-repay/. Remember, if interest rates rise, it’s expected that non-QM loans will gain popularity. Be sure to properly vet your borrowers with our verification services.
*Equifax Workforce Solutions is a business unit of Equifax Inc., Atlanta, Georgia. Credit Plus is an authorized reseller of products and services provided through Equifax.