Unlike non-qualified mortgage, or non-QM, production in the jumbo-prime space — which matured several years ago — non-QM production for nonprime and
hard money loans is still growing because of demand
for higher yields in the re-emerging secondary market.
Nonprime production, however, has not increased as
quickly as many expected.
A lot of originators say they would like to originate
more alternative products, such as agency fall-out,
bank-statement, bridge and fix-and-flip loans. Their
clients are interested in these products and their referral partners are looking for creative solutions. So, why
aren’t more industry professionals serving this market?
Many believe it is because lenders’ infrastructures
don’t support these programs properly, which makes
the origination process clunky and, oftentimes, out
of compliance. Because of the lack of certainty that
they will close, many mortgage professionals tend to
shy away from originating nonprime and hard money loans. Many argue it’s not worth investing time
and resources into learning new products or working
through a transaction, only to risk their reputation
should the process not go smoothly.
Originators are looking for easier ways to originate
alternative nonprime and hard money loans, but often find their software doesn’t support it. Many of the
most widely used pricing systems within the industry
are simply not configured to price nonprime credit
grades or hard money loans like fix-and-flip mortgages.
Additionally, the standard loan operating systems are
not set up to service these loans properly. Because of
this, new non-QM lenders are emerging and creating
their own software to fill the void.
To achieve success in this new segment of the industry, it is crucial to automate the non-QM process. Ideally,
new systems will be focused exclusively on this market
and won’t try to awkwardly force non-QM loans through
an old system designed to originate agency products.
There are several challenges to contend with when
it comes to pricing nonprime and hard money loans,
however. First, nonprime loans have loan-level pricing
adjustments at each credit grade. These adjustments
are based on both derogatory items such as bankrupt-cies, foreclosures, late payments, etc., as well as FICO
credit scores. This system is different from prime loans
that use only FICO with no credit grades.
To price nonprime loans accurately, originators
need to cross-reference rate sheets with the borrow-
er’s credit report, which takes time and leaves room for
error. Hard money lenders traditionally price each loan
individually without rate sheets or written guidelines,
making it difficult for originators to quote rates and
terms accurately. This leads to a sluggish pace for the
process, which is unexpected by many real estate and
mortgage finance clients who are used to doing busi-
ness digitally and having transactions move quickly.
A second challenge is that hard money loans
like fix-and-flips have additional variables such as
loan-to-cost ratios and rehabilitation budgets, which
traditional loan-product pricing engines do not handle.
This can be solved with non-QM specific pricing
engines for use by originators.
Working with imprecise pricing commonly leads
to frustration, disappointment and fallout as transactions progress. The stakes are often particularly high
in the non-QM market, because these products are
frequently sought after by investors. Clients building a
real estate portfolio can become an excellent source of
repeat business for originators who conduct this business masterfully.
There also are considerable challenges when it
comes to prequalifying and underwriting these files.
Originators want certainty of closing prior to submitting loans to lenders, which triggers the sending of
a disclosure set — which can be a hundred pages or
more — to their borrowers.
Specifically, prior to submission, originators want
1. If they chose the correct credit grade and priced
2. If they calculated their borrower’s monthly income
correctly with the alternative documentation;
3. The loan program’s maximum debt-to-income
4. What type of assets can be used for reserves;
5. How many months of post-close reserves are
6. If gifts are allowed for downpayment, closing
costs and reserves; and
7. What other information they need prior to submission to make the process go smoothly.
Originators want the information needed to confidently submit a new file, and they also want fast, accurate
and compliant pre-qualifications, or prequals, which
many lenders cannot deliver on non-QM products.
Some non-QM lenders do offer prequals, but can’t
provide consistent turn times on them because they
don’t have enough staff or do not prioritize prequals.
Other lenders fall short by not having qualified staff
members perform prequals. This can result in contrary
underwriting decisions that cause the loss of a relationship for an originator. Lastly, some lenders do not
provide their originators with a secure environment to
upload prequal documentation, which has other compliance ramifications.
There is a need for a secure environment where all
prequals are reviewed in a timely manner by qualified
operations personnel. This would provide originators
with the confidence in certainty of closing they need
to originate nonprime and hard money loans.
Finally, within the re-emerging secondary market,
many small wholesalers underwrite files subject to
third-party or investor approvals, which results in a
double underwrite. This often leads to two rounds of
conditions or a declination, again putting the originator in the position of potentially losing a relationship.
When utilizing a non-QM lender, originators should
therefore confirm third-party/investor approvals are
not required if they want to ensure a speedier transaction with certainty of closing.
n n n
Non-QM lending offers considerable opportunity for
driven originators looking to grow their business. Real
estate agents and investors are always looking for
solution-minded mortgage professionals with access
to unique programs. Those willing to meet the challenge of providing the same service and consistency
on non-QM products that borrowers have come to expect from conventional financing will make the most
of this growing market. n
Brent Houston is chief executive officer with ALTRA Mortgage Capital LLC, an Orange County-based lender built to
serve third-party originators and provide access to non-agency and hard money mortgage products with its online
non-QM pricing and eligibility engine plus turn-time guarantees for certainty of close. Houston has 15 years of experience in the underwriting, system integration, marketing and
origination of private money real estate loans throughout
the United States. Learn more at altloan.com. Reach Houston
Are We Ready for Non-QM Lending?
Faith in the process is needed before tackling third-party nonprime loans
By Brent Houston
“There is a need for a
where all prequals
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timely manner by