Industry insights, Product and pricing, Capital markets, Mortgage tech
Non-QM: Five ways a PPE can make loan officers' lives easier
Loan officers are the public face of a financial institution. In addition to establishing and maintaining solid relationships with realtors and builders, they also act as trusted advisors to their borrowers – and this trust is crucial when working with a borrower that has applied for a non-Qualifying Mortgage (non-QM).
As all LOs are very much aware, every non-QM is a unique scenario which makes it all the more difficult to structure each loan effectively and efficiently. Due to the sheer number of moving parts at play, many deals end up falling through, resulting in dented borrower trust and lower satisfaction levels. To prevent unwanted complications – and make the entire non-QM process easier and faster in general – LOs should be able to lean into their Product and Pricing Engine (PPE) to shoulder much of the legwork for them. This grants LOs the time and ability to focus on what matters most: delivering an optimal experience for each and every borrower which creates a trusted, long-lasting relationship.
With that in mind, here are 5 functionality staples that a PPE should have to support non-QM.
1. Derogatory events
Unsurprisingly, the ability to accurately assess derogatory events, including but not limited to bankruptcies, short-term rentals, and foreclosure, is key in the non-QM space.
Every financial institution has a unique risk appetite, requiring various lengths of time to have passed after a derogatory event before a borrower is once again eligible for a mortgage. This timing can range from two to seven years or even longer, depending on the lender and the type of derogatory event. To prevent LOs from unnecessarily excluding borrowers that meet these criteria, their PPE should be able to accommodate these nuances as well as any extenuating circumstances.
Due to the unprecedented economic shock associated with the first wave of the COVID-19 pandemic, it is estimated that 13% of all mortgage borrowers were in forbearance for at least one month between March 2020 and 2021, with 35% of those still in forbearance at the end of this period.
Though forbearance is nothing new, given these sky-high figures, it is safe to assume that LOs are likely to come across a higher proportion of borrowers with late payments on their record in the coming years. To ensure that they receive the best possible service for their unique scenario, a PPE needs to be able to capture in-depth data about forbearance. And given the exceptional circumstances of the pandemic, a one-size-fits-all approach simply will not suffice.
3. Documentation options
For a typical mortgage applicant, lenders expect to see years’ worth of documentation covering rental/address history, proof of income, credit history, employment history, and more. But many non-QM applicants – such as refugees, foreign nationals who have recently migrated to the U.S., U.S. nationals who have spent a period living abroad – cannot easily provide all this information in a verifiable format.
A more common scenario today applies to the self-employed individual. With the departure of subprime lending in 2008, self-employed borrowers found themselves deeply impacted as there were fewer options available to borrow. To enable LOs to cater to these groups, their PPE should be able to price loans using just one year's worth of full documentation, as well as support a range of other documentation options such as bank statements, verification of employment, asset qualification, 1099, CPA P&L, and DSCR.
4. Debt Service Coverage Ratio (DSCR)
A DSCR mortgage is a popular option for property investors looking to expand their portfolios. Rather than relying on borrowers’ earnings, DSCR loans are granted based on a property’s ability to generate income. At a basic level, DSCR is calculated by dividing the net operating income of a property by the debt service of the loan.
For LOs to navigate investors toward the best possible DSCR loan product, their PPE should not only support the ratio, but also be able to capture and analyze additional information related to the investor to allow for the right product match. This unique function is not readily available in legacy solutions and is exclusive to Polly’s cloud-native, high-performance PPE.
5. Prepayment penalties
Most non-traditional mortgages feature a prepayment penalty, also known as a prepay. The prepay percentage, and whether it is fixed over several years or declines steadily over a fixed amount of time, can have a significant impact on the rates that borrowers are offered. Some may be willing to accept higher prepays in favor of a better rate. Others might prefer to have the freedom to repay early.
To give borrowers a full understanding of their options, a PPE must enable LOs to easily compare various prepay scenarios. Trying to manage these comparisons manually can often lead to LO headaches and dissatisfaction from the borrower if left waiting days.
The devil is in the details
With a magnitude of moving parts and the demand for non-traditional loans on the rise, it is important that LOs capture as much information as possible about borrowers to help navigate them toward the right product. To enable this, LOs need the most advanced technology solutions that will facilitate their success rather than hinder it. A flexible and highly automated PPE sits at the heart of this equation, enabling LOs to confidently issue a wider variety of non-QM loans that more closely align with borrowers’ evolving needs.
New and modern PPEs not only deliver this functional depth, but they also provide a clear and concise view for the LO so they can easily direct borrowers to the right non-traditional loan option without the unnecessary clutter and distraction present in legacy solutions.
So, loan officers: Do you have the control, power, and flexible automation tools you need to be successful with non-traditional/non-QM loan scenarios as we navigate 2023? What more do you want or need out of your current pricing experience that you might be missing today with legacy solutions? Let's talk.