October 23rd, 2013 10:37 AM by Gregg Mower
If you are in mortgage business you have heard of Qualified Mortgages or QM. But do you know what it really is, and did you know there are alternatives for your investors? A qualified mortgage is a home loan that is attached to a primary residence and fits the Dodd Frank rules for protecting home owners from predatory lending with high interest rates and fees. This rule is under Regulation Z Truth in Lending Act and was designed to make sure a consumer will have the ability to repay the loan at the time of application. The final ruling holds these elements for creditors to determine the “ability-to-repay” their home loan. These eight factors are; 1. Current or reasonably expected income or assets; 2 current employment status; 3 the monthly payment on the covered transaction; 4 the monthly payment on any simultaneous loan; 5 the monthly payment for mortgage related obligations; 6 current debt obligations; 7 the monthly debt-to-income ratio or residual income and 8 credit history. These factors are simply government’s way of trying to protect the home owner.
These are all good guidelines and have to be followed if you are doing transactions that are going to be sold to FNMA, FHLMC, GNMA. These loans are the loans that people gravitate to as they have the lowest rates. These loans are your Conventional 30 year, 15 year fixed rates, FHA loans, VA loans, USDA loans. The rule has also outlawed the Adjustable rate mortgage in these categories as well. The rule was designed to protect the consumer from Loan Companies that had a practice of charging higher rates and fees in exchange for higher risk loans that may not have required a borrower to verify their income or assets to qualify for a loan. All good intentions, however, the unintended consequences are that the people that may not be able to prove income levels as they might be self-employed, or paid commission may not be able to obtain such a loan. It might also prohibit certain minority groups from being able to purchase a home. So are there alternatives to a “Qualified Mortgage”?
Yes, there are alternative mortgage options for those folks that need an alternative to this type of financing. Non-Qualified Mortgages are those loans that are funded by private sources, hedge funds, mortgage pools. This type of financing is predominantly for Real Estate investors or non-occupied loans. These “non-owner occupied loans” fall outside of the Dodd Frank Act and allow for higher risk loans. It is assumed that if you are buying investment property you are more astute or savvy in the Real Estate game and you know your risks of obtaining a loan with a higher rate and fees. These Non-Qualified loans are also known as Private money loans or Hard Money Loans and are not designed for long term loans. Generally, a loan like this is used to purchase Real Estate fast and for buyer of Real Estate to look like a cash buyer to sellers. There generally are no limitations on the types of properties that can be financed with this type of loan. Hard Money loans can be used to purchase, 1-4 family homes, construction, apartments, churches, warehouses, commercial building, raw land and list goes on. The documentation on these loans are far less, as the assumption is that if someone is going to put a large down payment on a property, the likelihood of them walking away is far less than loans with a low down payment. In the future I anticipate this type of money will be able to be used to help the owner occupied purchasing buyer, and it is in some cases, but since there have been many rules set for “owner-occupied” primary residences most non-qualified lenders stay away from owner-occupied Hard Money transactions for obvious reasons.` This type of financing has not made the main stream media yet, however, it has been around far longer most people know, for over a century this type of lending has been available to folks in form or another. So if you are Loan professional or a Consumer you need to be aware that this money is out there.
The money comes from everywhere in today’s market as the Banks are only giving maybe 1% on your money and the stock market is volatile, so many ordinary folks are investing into these mortgage notes and seeing double digit returns on their money. It is not for everyone, but those that have money and are not sure where they should be investing should look towards the non-qualified mortgage markets. There are companies that can invest your money in a note that will be an interest only note where your principle is persevered and you are protected by the equity in the property you are lending on. The average Loan-to-Value on these transactions are 50-75%, so if for some reason there is a default you get the property to sell to recoup your investment plus appreciation. Now, you can have this done by private firms that specialize in foreclosure or a servicing mortgage company. As usual if you have any questions or comment please leave them on this blog.