30-year loan that features a 10-year interest-only option, for example, gives a borrower a low payment for 10years, butforthe remaining20years,
the borrower is forced to make substantially higher
payments. That’s because the borrower has a shorter
period of time to pay off the entire loan after the
initial 10-year interest-only option expires.
So how do non-QM lenders apply ATR to today’s
interest-only loans? Simple, utilize the higher payment that begins in the 11th year of the loan to
qualify borrowers and to ensure they can repay the
mortgage. Of course, many borrowers today would
not be able to qualify for an interest-only program
under that approach — compared to the way things
used to be done when subprime loans were popular prior to the housing crash.
In response, many lenders have introduced a
40-year amortized loan for interest-only programs,
providing borrowers with an additional option to
meet their needs. Under a 40-year amortized program with the interest-only option, the borrower
would make payments on the interest for 10 years
and then have 30 years remaining to pay off the
loan. Compared to a 30-year interest-only loan, the
payment in the 11th year would be substantially
lower with a 40-year loan.
Naturally, there are many exceptions and factors
to consider when determining a borrower’s ability to repay a particular loan. The overall concept,
however, still boils down to ensuring responsible
lending. It is about providing financing for borrowers who will be able to repay the loans today and
down the road.
By applying ATR in new ways to more loan programs,
the mortgage industry can expand the non-QM environment, make more financing solutions available
for more borrowers and put more people into homes
they can afford — which we all want to see happen. n
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Raymond Eshaghian is the president and founder of
Greenbox Loans Inc, a wholesale lender specializing in
non-QM/nonprime loans. Eshaghian has more than 28 years
of experience in mortgage lending in executive or principal
roles. He has vast experience and expertise in the non-QM
market. Reach Eshaghian at email@example.com.