As banks and mortgage lenders read the CFPB's "qualified mortgage" rule, they are finding that self-employed borrowers typically fall outside the definition of QM. The self-employed and sole proprietors of small businesses, from plumbers to interior decorators to caterers, may have the hardest time proving their income from bonuses or commissions, and may have high debt-to-income ratios because they typically list the lowest possible income on their tax returns.
Industry experts say some banks are leery about originating loans to the self-employed out of fear they will be unable to document the borrower's ability to repay. They also may be reluctant as due to the new rules or the loan amount, such loans cannot be sold to Fannie Mae or Freddie Mac. But some lenders say they will continue lending to self-employed borrowers because, if they don't, someone else will. In most cases, they plan to make non-QM loans to these borrowers and then keep them on their balance sheets.
Under the new mortgage rules, borrowers must have a debt-to-income ratio of less than 43% to be considered a "qualified mortgage," which gives lenders the greatest protection from lawsuits. Loans that fall outside the new rules are considered non-QM and have fewer legal protections.
For now, most banks looking to generate more net interest income are sticking with interest-only or jumbo loans that would be considered non-QM. While there is not yet a secondary market outlet for non-QM loans, many expect that to develop over time. Holding loans on balance sheet also is attractive in lieu of buying 30-year mortgage-backed securities that are subject to mark-to-market accounting rules.
Competition for non-QM loans could heat up this year as lenders grapple with a shrinking home purchase market.
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