Shmuel Shayowitz (NMLS#19871) is President and Chief Lending Officer at Approved Funding, a privately held local mortgage banker and direct lender. Shmuel has over two decades of industry experience, including licenses and certifications as a certified mortgage underwriter, residential review appraiser, licensed real estate agent, and direct FHA specialized underwriter. Shmuel provides a uniquely holistic approach to comprehensive real estate and financial matters that goes well beyond any single transaction. Shmuel is an award-winning financier recognized for maximizing the short-term and long-term objectives of his client. As a contributing writer to many local and regional newspapers and publications, his insights have been featured in the media for many topics, including mortgages, personal finance, appraisals, and real estate trends.
Yes, you read the headline correctly, a non-qualified mortgage is a practical and viable option for potential mortgage applicants. Since early last year, new regulations were introduced and mortgage loans now fall under two distinct categories of “qualified” mortgages and “non-qualified” mortgages. While the label of these loan options might be misleading, a myriad of mortgage loan options is now available for the first time in years that can be a benefit to consumers looking for mortgages.
Background
The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 as a regulatory response to the financial crisis and the subsequent recession. As a result of this act, The Consumer Financial Protection Bureau (“CFPB”), an independent agency of the United States government, was created with the broad mandate of consumer protection in the financial sector.
The CFBP introduced “Qualified Mortgages” (“QM”) as a classification of loans that have certain, more conservative features that help make it more likely that borrowers will be able to afford their loan. A lender must categorically determine that a borrower has the ability to repay the mortgage, regardless of how secure the collateral may be; otherwise it cannot be classified as a qualified mortgage and would be subject to new standards.
Restriction on Qualified Mortgages
Certain loan features are not permitted in a Qualified Mortgage such as “interest-only” provisions, (where a borrower will pay only the interest without paying down the principal), a “negative amortization,” feature, (where the loan principal will increase over time) and “balloon payments” requirements (where a larger-than-usual payment will be due at the end of a specified loan term).
Additionally, loan terms cannot be longer than 30 years, and there is a limit as to how much income can be used as a qualification towards debt (also known as “debt to income ratios,” including the mortgage and all other monthly debt payments.
Impact on Mortgage Lending
When following the “qualified mortgage” standards, certain legal safeguards are given to the bank and lender that grant these mortgages. When a bank can show that it made sure applicants had the ability to repay their loan, and that it fell within the QM standards, there are less regulatory restrictions to them, and the loan is less likely to be challenged post-closing.
In order to preserve and ensure these benefits, many banks have limited their mortgage activities to granting mortgages that only fall into the category of “qualified mortgage,” or have altogether abandoned the residential lending arena altogether.
Opportunities to Borrowers
As identified above, having defined what a “qualified mortgage” is and isn’t, the CFBP has pushed many banks out of the mortgage business. This is detrimental to many mortgage applicants and potential borrowers as the typical local bank might not be a benefit to them when seeking a high-quality loan that otherwise falls out of this qualified standard.
The good news is that non-depository lenders, such as Approved Funding, are picking up the slack and offering affordable and creative loan options that are still compliant and also are extremely safe and worthwhile to qualified applicants. For those with limited income or asset verification, explainable credit imperfections or home valuation methods that don’t necessarily fall under the “QM” definition loans are still readily available to qualified applicants through the right lenders.
A competent mortgage banker, like Approved Funding, should be able to offer no-obligation consultations and options, easily identifying what available loan programs are available under the qualified mortgage standard, as well as those outside the labeled qualified mortgage definition that might still be a viable and useful mortgage solution to meet a homebuyer’s or homeowner’s needs.
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