In the past, lenders approved many mortgage applications even though they knew that borrowers could not afford to repay them, a practice that led to the 2008 financial crisis. The Consumer Financial Protection Bureau responded by adopting guidelines to stop this practice and to prevent future economic damage.
The CFPB set rules for qualified mortgages, which included income verification requirements and limits on debt-to-income ratio, loan terms, fees and points. The rules also prohibited negative amortization, interest-only loans and balloon payments.
What is a Non-Qualified Mortgage?
Many people were unable to meet the stricter loan criteria because of unusual circumstances, but they could still afford to repay a mortgage. For example, some borrowers had substantial assets, incomes that fluctuated because of self-employment, were real estate investors or foreign nationals, or had previous credit issues but had regained their financial footing.
Non-qualified mortgages were offered to help those individuals buy or refinance a first or second home, or an investment property. Non-qualified loans had different guidelines that allowed lenders to look at the big picture when reviewing applications. Lenders could use nontraditional methods to verify income and they could sometimes approve applicants who would have been denied a mortgage under the CFPB guidelines.
Borrowers with non-qualified mortgages typically had higher interest rates and were required to make higher down payments than those with qualified mortgages. Lenders who offered non-qualified mortgages were required to follow other guidelines to avoid giving high-risk loans to borrowers who might be unable to repay them.
How Things Have Changed Due to COVID-19
Lenders generally approve mortgage applications and then sell the loans to investors, who earn a profit from mortgage interest. The financial uncertainty brought about by the coronavirus pandemic has made investors nervous about purchasing new, non-qualified mortgages.
Lenders don’t want to get stuck with mortgages that investors don’t want and that borrowers may not be able to repay, therefore, many have decided to stop offering non-qualified mortgages. Although most lenders expect the change to be temporary, it is unclear when borrowers may be able to get approved for non-qualified loans again.
If you recently applied for a non-qualified mortgage, your lender may have already contacted you to explain how the coronavirus has affected its status. If you have not yet heard from your lender, reach out to the company and inquire about the status of your loan application. The lender may not be able to tell you when or if your mortgage application will be approved and what the exact terms of the loan will be, but a representative may be able to provide you with some useful information or advice.