A credit score is one of the key imperatives for borrowers who are looking for home loans. Many home loan options in the USA mandate borrowers to have good credit scores to fetch the home loan at the best interest rates. Unfortunately, not every home loan seeker can meet these eligibility criteria. Should borrowers with bad credit stay back, dreaming of home loans? Necessarily not. You can get home loans through unconventional financing options available in the US. These loans are alternatively termed as non-qualified mortgages (non-QM). Let’s read further to explore.
Real estate crisis
During the real estate crisis in the year 2008, many lost their homeownership due to their inability to manage repayments and filed for bankruptcy. The mortgage lending requirements in the USA underwent strict regulations, and funds available for homeownership were drastically reduced. Today’s market has provided a much better environment for mortgage seekers with bad credit history. If you filed for bankruptcy a decade ago, it will be cleared off from your credit history, offering you a second chance to apply for a home loan as there will be a surge in credit history.
Unconventional Financing
Unlike conventional loans and FHA loans that are offered to persons with good credit, unconventional loans are designed for the ones with poor credit. These loans are the only home loan options for people with bad credit. The availability of non-QM loans is higher compared to 20009, a year after the real estate housing crisis, so you win a better chance to get a home loan with poor credit. However, these non-QM loans have high qualifying standards. The lenders of these loans have high flexibility in underwriting guidelines.
Features of Unconventional loans
- loan terms
Non- QM loans have a great flexibility compared to conventional ones in terms of repayment. If you are still running on tight budgets, you can choose to go with interest-only payments during the initial phase if the loan term exceeds 30 years.
- Interest Rates
The interest rates on these non-QM loans tend to be higher than the conventional mortgage and can vary at per lender’s discretion; it usually aligns with the risk the lender is taking to issue the loan to a borrower.
- Down Payment Requirement
Lenders of non-QM loans expect higher down payments to reduce the risk in issuing the home loan. Check the downpayment requirements with the lender before committing to the deal.
Common Requirements for Non-QM Mortgage
Though non-QM loans have high requirement standards, they are the same with every lender. However, here are some common requirements listed out
- A decent credit scores
- Debt income ratio of 50% (varies by lender)
- Proof of self-employment for two years or 12 to24 months bank statements for a few
- Business license or any other related document for business professionals
Though set on high standards, there is less predatory lending for non-qualifying borrowers because they can get the loan without proving their ability to repay it. In the past, the lenders had teaser introductory rates that were quickly elasticated to larger payments, making it impossible for the home loan borrowers to continue their payments further.
Summary
Non-QM loans are big good news for borrowers with poor credit as it gives them an opportunity to participate in the real estate market again. However, you should be prudent in choosing these types of loans. Go through all the details of the loan requirements carefully. Take advice from a trusted mortgage lender to get a clear understanding of the terms and conditions of the loan
