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- Demand for mortgages has boomed during the pandemic.
- So has the number of self-employed people, a group that often has trouble qualifying for a mortgage.
- As a result, unconventional mortgages are gaining traction, while other home lending plummets.
The number of Americans who have trouble landing a mortgage is on the rise, and a group of niche lenders are cashing in to help.
Sprout Mortgage, Angel Oak, Carrington, and Athas Capital Group are four of the lenders who promise to help borrowers without a W-2. They offer competitive pricing and say they help those who are on the road to repairing their credit.
Their specialty caters to investors and everyday borrowers who couldn’t qualify for the tight underwriting standards that followed the 2008 housing bust, as well as to the self-employed. Following the subprime-mortgage crisis, they’ve been embraced by some but haven’t played a major role in US housing finance.
Now, with the rest of the mortgage industry shrinking, these lenders are doing better than ever by catering to borrowers who were outcasts of the market because of low credit scores, heavy debt, or their status as nonsalaried workers. These lenders’ loans differ from conventional mortgages, as they aren’t guaranteed by the US government or the finance agencies Fannie Mae and Freddie Mac — which have stricter underwriting guidelines — and they don’t meet the definition of a gold-standard “qualified mortgage” set by the Consumer Financial Protection Bureau.
The pool of borrowers of these “non-QM” loans may be large, with about 8% of mortgage applications denied each year, according to the mortgage publisher HSH. In another study, the personal-finance company NerdWallet found that while lender-processed loans increased 10% in 2020 from 2019, there were roughly 58,000 more denials.
As for the self-employed, Pew Research found last year there were about 16 million of those workers.
“There are more self-employed business owners since the onset of the pandemic, and their needs are not easily met by traditional loans,” Sam Bjelac, an executive vice president at Sprout Mortgage, said.
Sprout Mortgage is a lender run by Michael Strauss, the former chief of American Home Mortgage, one of the many subprime lenders that went bankrupt in the late 2000s. More regular borrowers are also finding they can’t fit into the standard mortgage box, either, Bjelac said.
So as the mortgage market intensifies its focus on these underserved workers, the non-QM market is expanding. By the end of the year, some experts predict that the non-QM market will as much as quadruple to $100 billion.
Angel Oak Mortgage Solutions, another non-QM lender, projected that its originations would surge to $7.5 billion this year from $3.9 billion in 2021. Angel Oak is finding 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, Tom Hutchens, an executive vice president at Angel Oak, said.
By contrast, conventional lenders are scrambling to downsize their businesses as soaring mortgage rates curb their business. The Mortgage Bankers Association forecast total US mortgage originations would probably plunge by 40% this year to $6.8 trillion, with most of that decline due to the drop in refinancings.
Non-QMs are ‘more of an art’
What’s ailing the conventional-mortgage market is helping the non-QM lenders, whose borrowers are less sensitive to interest-rate movements because there are few alternatives. Brokers who were busy churning out easier-to-close loan refinances over the past several years are suddenly eager to help borrowers who have a harder time qualifying for loans, including those who could take advantage of non-QM products, Brian O’Shaughnessy, the co-CEO of Athas Capital Group, said.
When originating a loan for non-QM borrowers or investors, lenders like Angel Oak and Athas are willing to consider a wider variety of financial information than lenders that sell their originations to Fannie Mae or Freddie Mac. For instance, 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’ve got a good credit score and probably a history of being a property investor, then we think that’s a good loan to make,” Hutchens said.
“It really is more of an art and a specialty in the non-QM,” said Greg Austin, an executive vice president at the California firm Carrington Mortgage Services, another non-QM lender with ties to the pre-crisis subprime industry.
Carrington — as is common with non-QM lenders — works with self-employed borrowers to parse through bank statements, profit and loss statements, or 1099s to determine their loan eligibility. Some investors even keep a traditional job, just so their W-2 can save them from a headache.
“It’s so much harder to get a loan being self-employed,” Ryan Chaw, a real-estate investor, told Insider.
Non-QMs are a ‘last resort’
Rashad Tillman, a California resident, said non-QM loans ended up being both a lifeline and a “last resort.” Since he started looking for homes in early 2020, the 31-year-old father of three — and soon to be four — said he faced obstacles at nearly every turn.
First, he said a total of four real-estate agents and four loan officers didn’t want to work with him because of his unique income stream.
“When it comes to the self-employed person, they’re like, ‘Well, that takes too much time and that’s too much effort.'” he told Insider.
Tillman’s financial picture is complicated. He’s a full-time manager at a used-car dealership but also earns income from his small businesses. Because of the way Tillman structures his write-offs, the highest mortgage he qualified for under traditional methods was $400,000, though he was confident he could afford more.
“I can’t look at a shack out here in California for $400,000,” he said.
Tillman said he learned of non-QM loans through a Facebook ad touting “bank statement loans,” which are approved based on the deposits reflected in a bank account instead of a W-2. He filled out the survey that was attached, but that lender would look at only 50% of what he deposited in his business bank account.
He kept searching until he found New American Funding, which he said offered him a non-QM loan that evaluated 100% of his income.
His journey didn’t stop there. Two homebuilding companies wouldn’t accept non-QM loans. It wasn’t until October, after nearly 10 months of searching and nearly giving up, that he found an agreeable homebuilder in Riverside County, California, about 90 minutes from Los Angeles.
He was able to purchase a three-bedroom, two-bathroom $640,000 home still under construction, which has the yard of his dreams. That wouldn’t have been possible without the alternative mortgage, he said.
“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,” he said.
A downside to non-QM mortgages is that interest rates are higher than conventional loans, in part because they are sold and packaged into private mortgage-backed securities that don’t carry the payment guarantees of bonds issued by Fannie Mae, Freddie Mac, or Ginnie Mae. Rates have risen for all mortgages since the start of the year, though Tillman is still paying about 7%, or 2 percentage points more than a conventional loan.
The rate is just part of the cost of having his own businesses, Tillman said.
“Either way, that money was going to go somewhere,” he said. “Do I want to throw it towards the IRS? Or do I throw it towards my down payment on a house?”
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