Today’s Homebuyers Ask: What Are Nonprime Mortgages Exactly?

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Nonprime mortgages. It’s a fairly new term referring to home loans marketed for nonprime borrowers. These nonprime borrowers can be anyone with a credit score in the high 600s, down payment of 20%, and a fully documented income. Or as they say, terms vary per lender.

Who are nonprime borrowers here? How do you qualify for nonprime mortgages? Let’s help you find a lender.

The Origins of Nonprime Loans

One can look back to the mortgage crisis of almost a decade ago when mortgages made to borrowers with unverifiable income, no down payments, and little to no lending oversight proliferated. Loans with these characteristics more or less contributed to the housing crisis that together with other unfortunate financial events contributed to the Great Recession.

That is hardly the case nowadays. Financial regulations have been established to control or at least mitigate another wave of crisis arising from unsafe loans. While the loans during the mortgage crisis era retain some of their names for recall perhaps, their qualities have been improved on. Thanks to stricter regulations that lead to tighter credit guidelines.

An important guideline that arose from these newer financial controls is the ability-to-repay rule or ATR. This basically compels lenders to do their due diligence in ensuring that the borrower can afford his/her mortgage. And by doing so, they will be protected from any lawsuits arising from borrower claims that they were issued mortgages they can’t afford.

Nonprime Mortgages = Nonqualified Mortgages

The ATR is embodied in a set of guidelines defining qualified mortgages. It is assumed that lenders have made their good-faith ATR determination in making QMs and that these loans per se don’t contain terms that are detrimental to consumers such as interest-only periods, excessive points and fees, and negative amortization.

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But the CFPB who issued implementing guidelines to the ATR rule has a clarification about loans still being appropriate even if they do not meet QM standards.

In an extra note to its QM pamphlet, the Bureau was quoted as saying, “Even if a loan is not a qualified mortgage, it can still be an appropriate loan.”

The Bureau added that the lenders can make any mortgage, be it QM or non-QM, for as long as they make an ability-to-repay assessment based on underwriting factors which they have relied on to make sound loans.

Qualities of Nonprime Mortgages

With ATR as the centerpiece safety feature of today’s mortgages, one can also expect this and other features in nonprime mortgages that make them safer compared with home loans of the yesteryears:

  1. Down payments. Except for government-backed and agency mortgages, one is likely to contribute a higher share of the home’s purchase price as down payment. The size of the down payment would depend on the risk profile of the borrower. Down payments serve as a cushion for borrowers in case their home values go downward.
  2. Credit scores. While it was found in June that more consumers made down payments below 10%, their higher credit scores compensated for the higher loan-to-value ratios (LTVs). According to Black Knight Financial Services, Inc.’s June 2017 Mortgage Monitor, credit scores of consumers who took out purchase loans on that month were 50 points higher than those originated in the run-up years to the mortgage crisis.
  3. Prepayment penalties. Nowadays, it’s rare to come across loans with prepayment penalties. So homeowners are now freer to prepay their mortgages by making extra payments toward their principal every month so they can pay off their loans early.
  4. Appraisals. Inflated property values allowed for home loans to be approved faster in a wider mortgage fraud that contributed to the housing bubble. After Dodd-Frank Act was passed, appraisers are required to be third party and independent from the lenders. This ensures that property values are accurate and reliable.
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