Non-Prime Lending today is fundamentally the same product I grew up with in the late 80’s and early 90’s and that was primarily offered by Finance Companies and Savings and Loans prior to that. These loans formally called Subprime, B&C Lending, Hard Money, and now mostly referred to as Non-Prime or Non-Dodd-Frank lending, Non-QM, Or even Alt-QM. The high fees usually associated with these products has been greatly reduced due to regulations, but there are still profits in the higher than market rates and still on average higher fees and costs than traditional FNMA or FHLMC Financing. “Back in the day” the typical double-digit start rate would also include 10%+ in points and over $2000 in junk fees and a very pricey prepayment penalty. Non-prime lending today more typically is priced from 1.5% to 4.00% higher than conforming mortgage rates and priced between 1-5% points with about the same in junk charges.
These loans are typically 30 years fixed or adjustable with 3-10 year fixed periods. Lenders sometimes offer Interest Only or 40 year amortization options. To determine a non-prime loans pricing, we need to determine the RISK. Below is a diagram of a lenders grid. You can easily see how the combination of Credit Score, Loan To Value, Mortgage History and Significant Credit Events and Transaction Type can affect your interest rate.
You can document your income with traditional pay-stubs, W-2’s or 1040’s or you can use Bank Statements. You can even use bank assets in a way that determines monthly income based on those those assets. Stated Income is an option once again, as is Stated Investor Income, where as residential investment property is qualified based on the Debt Service Coverage Ratio in an appraisal.
This loan was always primarily associated with equity lending. However prior to the great recession (depression for me) the product’s LTV’s started to elevate. With the introduction of Wall Street securitization, credit depth and makes sense lending went out the window. And so after Gramma on fixed income could buy a dream home with stated income on an 80/20 loan combo with a foreclosure the week prior. A true low in the lending industry. This time the product has re-emerged in its earlier more conservative form.
These loans can be used to do all of the following types of transactions. Purchase a home, Refinance a Home, Cash-Out your equity in a primary residence or an investment property. You can fix and flip a property. You can use these as home improvement loans. You can use these as swing loans as their are many times no prepayment penalties. You can use these loans to buy unique properties like non-warranted condos, or high rise condos. You can use these loans to borrower a down payment for another property. You can use these loans to close BK 13’s or cure a foreclosure. That’s a lot of uses and I am sure I’ve missed a couple.
It makes sense that the higher leverage or Loan To Value (LTV) you need, the higher the rate should be, and as you add risk, you can see that the available LTV does drop even as the rates rise. So a 700+ credit score with 0x30 and LTV of 50% is a much LESS risky loan than the 550+ 1×90, previous BK on a cash-out refinance.
The key to these loans is to have a direct conduit. Some companies layer on many fees and added expenses. These loan fees can be negotiated in some cases. Don’t be afraid to ask for exceptions to make a deal fit. This isn’t the conventional lock desk. And make sure to work with a competent seasoned licensed Loan Originator
It’s important to be honest with yourself when pricing these loans. You MUST have a complete application and understand all the pitfalls of your borrower and the property. It’s a big difference lending on a Single Family Residence rather than a Mobile Home. In fact, its a decline versus an approval in many cases.
Let’s take a look at pricing adjustments. Once you’ve determined your base rate and LTV. You need to check your adjustments. These are typically additional risk layers a lender is making adjustments for to maintain their own profitability on a loan. It makes sense, that if you want Interest Only that loan is inherently more risky as the balance of the loan doesn’t drop for years. And again, it makes sense that a property that is NOT your primary residence is a more risky loan and at greater risk for default if you have a life event. These adjustments typically are added to rate and sometimes rate and cost.
Non prime lending is filling needs for borrowers who have good cash flow but come tax time tend to show lower results due to deductions and a variety of reasons. Or for people who have had significant credit events. These financing options are great for people trying to get to the next level in their investments by risking a little more in interest rate to have easy to obtain financing. People trying to get out of BK and have equity in today’s environment. People trying to get current on their mortgages after years of modified mortgages and foreclosure fees. These are great options for those that finally were able to get rid of their homes but were ready to buy years ago, only to be stalled with that active zombie foreclosure.
Debt to Income Ratios are higher, right around 50%, Income Doc requirements are fluid and there are many different ways to document your income. Again the less income documentation you can provide the higher the rate and cost. Stated Income being the most expensive, but available.
Loan Amounts vary greatly. You can get small loans under $100,000 to well over $5 million with some lenders.
This financing is heavily dependent on the property as collateral. This is after all equity lending in reality. The underlying protection in all these loans is that if you or your client defaults, the lender will take the property. And it won’t be some zombie foreclosure. These lenders will act.
These loans are available in most states. Many state and federal limitations apply. These loans are risky and after the collapse in 2008, the market for this product has only recently begun to spike. Lenders are still gun shy from the risky lending days of the past. Although memories are very short.
And these loans are still risky. They should not be taken out without a good plan for repayment. These rates are higher and terms are more onerous than conventional conforming financing. You should ALWAYS make sure you don’t qualify for conforming financing before you consider these non-prime products.
This article was not an advertisement or an offer to lend.
Michael A. Foote, CMB – Certified Mortgage Banker | 30 years experience | Licensed Real Estate Broker #01149645 NMLS 1059372 235435