The wide world of creative mortgage qualifying — what we call non-qualified mortgages or non-QM — has subsequently planted itself squarely in the fixed-rate second mortgage and home equity line of credit arenas.
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These nontraditional ways to make positive credit decisions for second liens without tax returns are enabling equity access behind ultra-low, now untouchable fixed-rate first mortgages of the COVID era.
Before digging into creative qualifying details, let’s first learn the difference between a fixed-rate second mortgage and a home equity line of credit or HELOC.
Fixed-rate second liens, sometimes called home equity loans or HELOANS, help a homeowner tap equity, providing a lump sum of cash at the outset. The interest rate charged is always a predictable principal and interest fixed-rate payment over the life of the loan, which can span 15, 20 or even 30 years.
Unlike a fixed-rate second, HELOC is a second lien against your property using an adjustable- or variable-rate mortgage as a revolving line of credit. The beauty of a HELOC is you don’t have to take out any or all of the funds upfront. This allows you to borrow against your home equity as needed in the first 10 years of the mortgage term. You only pay, at minimum, interest only on the exact amount you borrow.
The downside to a HELOC is the variable-interest rate can increase (or decrease) over time. The rate is calculated monthly, typically using the Wall Street Prime Rate index (currently at 6.75%) plus a margin (or lenders profit margin) on top of the index. For example, if the rate is prime plus a 1% margin, the rate would be 7.75%.
HELOCs also have a minimum interest-only required payment for the first 10 years of a 25- or 30-year mortgage term.
The calculated interest rates for both HELOANS and HELOCs are based on the lowest middle credit score of all borrowers, the remaining equity or loan-to-value, the type of income documentation and the type of property (primary residence, second home or investment property).
Now for the fun stuff.
Twelve or 24 months of business or personal bank statement deposits can be used to calculate income instead of using tax returns for self-employed folks, freelancers and 1099 earners.
The calculation works by adding up all deposits over, say, the most recent 12-month period. Transfers from other accounts are excluded. Divide by 12 months and then subtract an overhead expense factor.
For example, say all the deposits over a 12-month period add up to $120,000. Divide $120,000 by 12 months, which equals $10,000 per month. Then you subtract an overhead expense of 20% for a home-based business, which calculates the monthly income at $8,000.
The purpose of using bank statements is that a borrower typically will have a higher qualifying income than using tax returns, because most tax filers get aggressive on their income deductions. That means the borrower has a lower net qualifying income using those tax returns.
Bank statement loans are aggressive in terms of borrowing power. You can access up to 90% of your property value on a primary residence. The maximum equity access for a second home or rental property is 80%.
Another route you can take is to use 1099s or the most recent one or two years as income instead of tax returns or bank statements.
How about asset depletion to either qualify or to supplement your other income? You can use 100% of your savings, 90% of your stocks and mutual funds and 80% of your retirement accounts.
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For example, let’s say you have $250,000 calculated for asset depletion. We divide the $250,000 into 60 months. That provides you with an additional $4,167 of monthly qualifying income.
Another nifty idea for a second lien equity tap is something called DSCR or “debt service coverage ratio” for rental properties. You don’t have to be self-employed to qualify for this.
The big idea is that the total payments for your first mortgage and second lien along with your monthly property tax, insurance and HOA payments do not exceed the monthly rent you receive.
For example, say your tenant pays you a monthly rent of $4,500. If the total payments due are at least equal to or greater than the $4,500, you qualify using DSCR.
The HELOANs and HELOCs have maximum loan amounts of up to $850,000.
The minimum credit score (lowest middle FICO score for all borrowers) for most of these programs is 660.
U.S. citizens and permanent resident aliens are eligible.
Non-occupying co-borrowers are not allowed in respect to primary residence second liens.
And a note to borrowers: If you can qualify for a full document loan using tax returns, W2s and the like instead of these non-QM financing instruments, you will get better interest rates and higher cash-out percentages.
Freddie Mac rate news
The 30-year fixed rate averaged 6.55%, 6 basis points higher than last week. The 15-year fixed rate averaged 5.93%, 11 basis points higher than last week.
The Mortgage Bankers Association reported a 2.7% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets an average 30-year fixed rate on a conforming $832,750 loan, last year’s payment was $110 more than this week’s payment of $5,291.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.75 %, a 15-year conventional at 5.625%, a 30-year conventional at 6.25%, a 15-year conventional high balance at 5.99% ($832,751 to $1,249,125 in LA and OC and $832,751 to $1,104,000 in San Diego), a 30-year high balance conventional at 6.5% and a jumbo 30-year-fixed at 6.25%.
Eye-catcher loan program of the week: A 30-year mortgage, 30% down, 5.375% for the first five years payments, and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or [email protected].
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