This post was originally posted on Basis Point: Perhaps the 2022 “subprime” mortgage has a top-notch credit score and two other safe elements.
Prior to 2008, ungoverned loans became widely known as subprime, despite the flashy marketing names they had at the time. The flashy name they are currently giving is Non-QM, which the government has called Fannie Mae, Freddie Mac, or a “non-qualified” mortgage loan that the Federal Housing Authority does not return. And these are far from the 2022 subprime mortgages.
These loans may not have traditional recurring salary income, but are made to qualified people if the lender properly assesses the bank’s cash flow and money.
It is very common for entrepreneurs to have consistent but irregular cadence income, and today’s non-QM loans are for such people.
CoreLogic has rounded up three key loan quality statistics for buying a home in 1Q22 using non-QM.
– Credit score
– Total invoice divided by total revenue, debt-to-income ratio (DTI)
– Loan-to-value ratio (LTV). This is the size of the mortgage divided by the asset value.
The first quarter non-QM loan quality statistics are in very good agreement with traditional government-backed loan statistics.
Archana Pradhan, Economist at Core Logic, explains in detail. This will be displayed with the image in this post.
– Figure 2 shows trends in the three key factors of underwriting all home purchase loans: credit score, DTI, and loan-to-value (LTV) ratio.
– In 2022, the average credit score for non-QM homebuyers was 771, while QM homebuyers were 776 and government loans were 714.
– Similarly, the average LTV for borrowers without QM was 76%, while the average LTV for borrowers with QM was 77%.
– However, the average DTI for non-QM homebuyers was higher than the DTI for borrowers with QM.
Not even close to “subprime mortgage 2022”
She is correct that non-QM DTIs are higher (37%) than government-sponsored DTIs (33%), but 37% DTIs are still systematically safe.
The published permissible DTI for government-sponsored mortgages is 43%. This means that you can spend 43% of your income on residential and non-residential debt each month.
In fact, government-sponsored mortgages (qualified mortgages or QM loans) allow up to 50% DTI if the loan is approved by an automated loan approval engine managed by Fannie Mae or Freddie Mac.
You may not want to be that high, but borrowers with high credit scores can get high DTI approval daily with government-sponsored loans.
So, talking about non-QM, people can spend up to 37% of their income on housing and non-residential debt, which is definitely within the safe zone of American housing and the economy.
If you have any questions about DTI or QM (also known as Government Assistance) and non-QM loans, please comment or contact us.
Below is a link to the full CoreLogic post and important notes on whether “subprime mortgages” are toxic, as many would expect.
Spoiler Note: Not so.