Bringing Back Buydowns
A temporary buydown is a program that allows a buyer to reduce their mortgage payment the first few years of their loan.
They're baaaack...
Every day, we're hearing about new subprime and Alt-A mortgage options. These include mortgage products for borrowers who have recently experienced a bankruptcy, short sale, or foreclosure. We have options for debt ratios up to 55%, low down payment loans with no mortgage insurance, and deals that can close three months before a borrower starts a new job.
We've also largely ditched the terms subprime, Alt-A, and stated income in favor of "non-QM" loans. Makes you feel better already, right?
A "non-QM" loan is one that does not meet the requirements of a qualified mortgage. Remember way back in 2014 when "ability to repay" standards became effective? These regulations require that mortgage lenders verify a borrower's ability to repay their loan. One way of confirming that ability is to originate something called a "qualified mortgage." A qualified mortgage has certain features that make it more likely the consumer will be able to afford his loan payments. If lenders issue qualified mortgages, they are also offered certain legal protections.
Lenders aren't required to issue qualified mortgages. They are free to originate non-QM loans. They just won't get the legal protections that come with a QM loan.
But QM or not, lenders must verify a borrower's ability to repay. That's not an option. We must consider a borrower's income, assets, employment, credit history, and liabilities.
Therefore, the non-QM market today looks vastly different from the old subprime market. The days of stated income loans, where a borrower's income was never confirmed, are over. Instead, lenders may offer "alternative documentation" loans, where a borrower's income is verified using bank statements instead of tax returns.
As long as lenders stick to top-tier borrowers, these loans aren't necessarily dangerous. We may offer a product for a borrower with a foreclosure from one year ago. But that borrower will need a 700+ credit score and 20% down. And you better believe his income will be examined with a fine tooth comb.
These are niche products for niche borrowers. And in my experience, they are not used often. As much hype as these products are getting, non-QM loan originations are a very small part of the market. According to a survey by the American Bankers Association, non-QM loans declined from 14% of the total mortgage market in 2015 to 9% of the market in 2016.
Why the decline? I think it's because mortgage guidelines in general are loosening and more and more people qualify for QM loans. Any loan that is saleable to Fannie Mae, Freddie Mac, FHA, VA, or USDA is considered a qualified mortgage (at least for the time being). Both Fannie and Freddie have products that require as little as 3% down. And FHA allows credit scores as low as 500 (although many lenders do not)! With guidelines that broad, few borrowers need a non-QM loan.
