As of 2015, according to Fair, Isaac and the Corporation for Enterprise Development, more than 150 million “non-prime” consumers lived in the United States. Yes, the number is staggering. There are more non-prime than prime consumers.
That may seem ominous, but most non-prime people are just as reliable and responsible as people who—as defined by financial regulations—look better on paper. The non-QM loan products developed for them are nothing like the sub-prime mortgages that spurred the Great Recession 10 years ago. When originators see beyond the stigma of terms such as non-prime and non-QM, they can fill their pipelines and enable quality individuals to buy homes.
Many factors can cause a buyer to be classified non-prime and ineligible for agency loans. If you had a foreclosure, too many medical bills, a tax lien or other unfortunate incident, you impaired your credit rating. This regulatory classification prevents agency lenders from considering in detail your ability to pay.
Since 2014, innovative mortgage lenders have deployed methods for determining the creditworthiness of this non-prime group. They offer non-QM loans that are underwritten manually, call for ability to repay standards, and often require significant down payments. During the time that they have been on the market, these alternative loans have performed well for wholesale lenders and originators who offer them. This new wave of mortgage lenders has significantly reduced delinquencies and created safer non-prime lending products, all while helping deserving borrowers purchase homes.
The Johnson Family in Dayton, Ohio needed this kind of help to purchase a larger home for their family of six. Although Walter and Jane were always employed and current on their mortgage payments, their travel and other expenses maxed out five credit cards when his parents were ill in another city and their oldest children began college. As a result, they cancelled the cards, agreed to a long-term payout, and their credit scores dropped into the 500s. They had sufficient income and equity in their current home to afford an upgrade, but could not qualify for an agency loan.
As their DTI ratio was well below 50 percent, despite the credit card incident, the Johnsons qualified for an Angel Oak Non-Prime Program loan with a rate below 5.5 percent.
Individual loan officers, the lending industry and the U.S. economy will steadily benefit as we seek out and serve families like the Johnsons, whose credit issues are understandable and manageable.
Tom Hutchens is Senior Vice President of Sales and Marketing at Angel Oak Mortgage Solutions, an Atlanta-based wholesale/correspondent lender licensed in more than 35 states and operating in the non-QM space for over three years. Tom has been in the real estate lending business for nearly 20 years. He may be reached by phone at (855) 539-4910 or e-mail Info@AngelOakMS.com.
This article originally appeared in the September 2017 print edition of National Mortgage Professional Magazine.