When you are looking to get a mortgage, either in purchasing a home or pulling equity out of your home, there are a lot of different options at your fingertips. Some of the most common mortgage programs to get would be conventional loans, FHA loans, USDA loans, and VA loans. One distinctive trait about these loan programs, is that in order for them to be written, it must fall under the parameters of being a “qualified mortgage.” When your loan application for these programs is submitted, an underwriter is going to go through your file with diligence to ensure it meets all the requirements for QM (qualified mortgage) and that you have a documentable ability to repay the loan. Each program has different criteria, between conventional, FHA, USDA, and VA – but, some of the broader ideas are going to be:
- Making sure that you have at least 2 years of employment in the same industry, with steady pay that will continue for the foreseeable future.
- Making sure that your credit is good, and that you have been able to maintain the debts you have taken on with on-time monthly payments. Heavier weight is given to mortgages and auto loans, when looking at on-time payment history.
- Making sure that your “debt-to-income ratios” are within strict parameters. We look at something called “front end” and “back end” ratios. The front end is your mortgage payment/income as a percentage, and your back end is your mortgage payment + all your monthly payments for debts (as shown on your credit reports)/income. Each loan program has different debt to income ratios, front end and back end; but the general rule of thumb is we like to see the front end in the 30% range and the back end in the 40% range. Those ratios may seem really strict, after all, “if I have enough money to pay all of it each month, why can’t I qualify even if those ratios are high?” Well, for starters, we use gross income to qualify you – so we want to make sure that you have enough funds available for taxes. Plus, when an underwriter looks at your file, they know that what shows on a credit report is a small part of the daily obligations of life. By having strict ratios, it ensures that you should be able to afford all your debts, your mortgage, your taxes, as well as food, utilities, home repairs and maintenance, and generally having money for quality of life spending.
- That the loan itself is stable, and affordable. QM doesn’t allow for things like “negative amortization,” “balloon payments,” and interest only features. When you get a qualified mortgage, it’s usually going to have a fixed period of regular monthly payments to eat down principal and interest until it is eventually paid off. Plus, QM regulations make sure that no excessive points or fees are charged.
However, not every individual has the same circumstances and scenario. Sometimes, the above aspects may disqualify certain individuals from being able to qualify in those more traditional loan programs. We mostly see this with self employed individuals, as well as real estate investors that have a lot of rental properties.
This is where non-traditional/non-QM loans come into place.
- Say you work on commission, and your pay is infrequent but hefty. Asset depletion or bank statement loans look at whatever you have sitting (and being deposited) in your bank, and use that as income. For self employed individuals that have large deposits coming in, at an infrequent schedule, due to commission work or seasonal influxes; this can be a very beneficial option.
- Say you don’t want to use your personal income to qualify, but you’ve got a rental property that has or will be generating income. A DSCR loan (debt service cover ratio loan) will utilize the market value rental income to help you qualify for the loan, making sure that the rental income generated is enough to cover the entire monthly payment.
- Say that you are remodeling an investment property, and perhaps your credit scores inhibit you from being able to do a conventional loan. A hard money loan may be a great temporary loan, to help you complete your project and get you to where you need to be – so that you can then refinance it into a different loan program, once the remodeling is done and you have a renter in place. Hard money loans also offer a lot of flexibility, such as the option to potentially build in some monthly payments from the loan’s proceeds.
Overall, mortgage programs all have their pros and cons, and each has something unique to offer. A good loan officer is going to exhaust all options to find something that you will both qualify for, and that will best fit your individual circumstances. A good loan program will be one that fits your circumstances like a well-tailored suit, and helps you meet your goals (both personally, and financially). For some people, this may be an FHA or conventional loan – and for others, this may be a bank statement or DSCR loan. It’s very important, for any loan program, to consider the benefits and drawbacks for both the short term and the long term. By figuring out what program will be best for you both today and in 10 years, you will set yourself up on a path to success.