A group of niche lenders are cashing in on the rise of Americans who have trouble getting a mortgage.
Four of the lenders promise to help borrowers who don't have a W-2. They offer competitive pricing and help those on the road to repairing their credit.
Their specialty caters to investors and everyday borrowers who couldn't get a loan after the 2008 housing bust, as well as to the self-employed. They haven't played a major role in US housing finance, but have been embraced by some.
With the rest of the mortgage industry decreasing, these lenders are doing better than ever by accommodating borrowers who were excluded from the market because of low credit scores, heavy debt, or their status as nonsalaried workers. These loans are not guaranteed by the US government or the finance agencies Fannie Mae and Freddie Mac, and they don't meet the definition of a conventional mortgage.
About 8% of mortgage applications are denied each year, according to the mortgage publisher. NerdWallet found that there were more denials of lender-processed loans in 2020 than there were in 2019.
There were 16 million self-employed workers last year, according to a study.
Sam Bjelac, an executive vice president at Sprout Mortgage, said that there are more self-employed business owners since the beginning of the Pandemic.
The former chief of American Home Mortgage went bankrupt in the late 2000s, and is now running a mortgage lender. Bjelac said that more regular borrowers are finding that they cannot fit into the standard mortgage box.
The non-QM market is expanding as the mortgage market focuses on these workers. By the end of the year, some experts predict that the non-QM market will be as much as $100 billion.
Angel Oak Mortgage Solutions projected that its originations would increase to $7.5 billion this year from $3.9 billion in 2021. Tom Hutchens, an executive vice president at Angel Oak, said that the borrowers that fit into the non-QM mold are very underserved today, just as they were when the company spotted the need and jumped into the non-QM business nearly a decade ago.
Conventional lenders are downsizing their businesses because of soaring mortgage rates. Most of the decline in total US mortgage originations will be due to the drop in refinancings, according to the Mortgage Bankers Association.
The borrowers of non-QM lenders are less sensitive to interest-rate movements because there are few alternatives. The co-CEO of At said that the brokers who were busy with easier-to-close loan refinances over the past several years are now eager to help borrowers who have a harder time getting a loan.
Angel Oak and Athas are willing to consider a wide range of financial information when they originate a loan for non-QM borrowers. Fannie Mae strictly limits the number of properties it finances for an investor, but Angel Oak approaches that differently.
If the cash flow of the investment property will cover their mortgage, taxes and insurance, and they have a good credit score, we think that is a good loan to make.
Greg Austin, an executive vice president at the California firm Carrington Mortgage Services, said that it is more of an art and a specialty in the non-QM.
As is common with non-QM lenders, Carrington works with self-employed borrowers to determine their loan eligibility through bank statements, profit and loss statements, or 1099s. Some investors keep a traditional job so they can keep their W-2.
Ryan Chaw, a real-estate investor, told Insider that it was hard to get a loan being self-employed.
The non-QM loans ended up being both a lifeline and a last resort for the 31 year old father of three.
He said that four real-estate agents and four loan officers didn't want to work with him because of his unique income stream.
He told Insider that self-employed people take too much time and effort.
There is a complicated financial picture. He is a full-time manager at a used-car dealership and also earns income from his small businesses. Because of the way he structures his write-offs, he was able to get a $400,000 mortgage under traditional methods.
He said that he couldn't look at a shack in California for $400,000.
Bank statement loans, which are approved based on the deposits reflected in a bank account instead of a W-2 were advertised in a Facebook ad. He filled out the survey, but the lender only looked at 50% of what he deposited.
He searched until he found New American Funding, which he said offered him a non-QM loan that evaluated 100% of his income.
His journey continued. Two homebuilders wouldn't accept non-QM loans. He found a home builder in California that was close to Los Angeles after nearly 10 months of searching.
He was able to purchase a three-bedroom, two-bathroom $640,000 home still under construction, which has the yard of his dreams. Without the alternative mortgage, that wouldn't have been possible.
It allowed me to finally qualify for a house that I can afford, that was in a safer area, that my wife would like, and that the kids can feel comfortable living in.
The interest rates on non-QM loans are higher than on conventional loans due to the fact that they are sold and packaged into private mortgage-backed securities that do not have the payment guarantees of Fannie Mae, Freddie Mac, or Ginnie Mae. Since the start of the year, rates have risen for all mortgages, but Tillman is still paying more than a conventional loan.
The rate is only part of the cost of having his own businesses.
He asked if he should throw it towards the IRS. Or do I put it towards my down payment?
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