The first step in understanding the home buying process is understanding the real estate vocabulary and jargon. Today, we continue with our series on first-time homebuyer terms and definitions. The often-ignored letter Q gets the royal treatment in this episode, defining the terms you need to know when buying your first home.
First Time Home Buyer Terms And Definitions From A-Z – “Q”
The Glossary Of The Vocabulary For First Time Home Buyers – “Q”
What is the first step in understanding the home buying process? Understanding the vocabulary and the real estate jargon that is going to be coming at you like you jumped into a portal and ended up at another dimension where they speak a completely different language. Sure, they all look like regular humans, regular people from your area that speak you language, but it does not feel like it. Terms and definitions, the letter Q. Let’s do this.
What is up? It’s David Sidoni. I’m the host and I’m going to be breaking down the vocab, all the important words that you need to know for buying a home. I’m doing this glossary style for you. There are not a lot of cues, so it’s probably going to be a little bit of a shorter episode, but there are going to be some very important lessons in this one, so pay close attention.
As a matter of fact, I know a lot of you people out there listen to this when you are at the gym, so take it from me, a 52-year-old former athlete who was even a professional dancer for a little bit in the 1990s. You didn’t know that, did you? It’s a short episode, so if you’re using this as your gym episode, use this as your stretch period. Don’t skimp on the stretching, unless you want to look like I do now walking down the stairs every single morning. It is not pretty.
Q, not just a James Bond character. Our first Q today is Qualified Mortgage. First, I’ll give you the Google definition. This is your basic Webster straight up. A Qualified Mortgage is a category of loans that have certain more stable features that help make them more likely that you’ll be able to afford your loan. If you listen to a lot of podcasts, you hear people say the term ‘unpack something.’ It used to be cool. Now, it’s getting all my nerves a little bit. I’m going to unpack this because there’s a lot to unpack in this one.
This is a term that came about as a protector after the last savage housing crash. If you’ve been following anything you have heard about 2008 to 2011, lots of people have horror stories. One of the big things you probably hear people freak out about if they got caught up in that is you hear about subprime loans. The Qualified Mortgages, that’s a major factor in eliminating lenders being able to give out those subprime loans like candy. This is why the next correction that we are facing in housing is going to be just that, a correction, not a crash.
All those things that people talk about when they talk about the great housing crash of 2008 to 2011, that was pre these hardcore, much more stringent Qualified Mortgages. This is a good term for you. Back in the old days, the banks got greedy because Wall Street got even more greedy. They started rating any crappy loan as A+. The banks started giving totally unqualified buyers loans. Do people all over the United States and Canada take advantage of this without really understanding the risk? Yeah. All you have to do is look at how in debt most people in North America are. With crazy high interest rates, credit cards, it doesn’t matter, “Put it on the card.” It’s been a mantra for the middle class for years.
Part of the fallout of the housing crash was the government had to step in and start making the credit card companies actually show you on your statement how much you would pay if you paid the minimums for the rest of your life. Did you know that? That happened because of the housing crash. All this created a huge change in the industry, a gigantor change. It was the way that lenders and banks are now regulated with these Qualified Mortgages, also known as QM loans.
You’re supposed to be more protected with more information. The rules to actually give people approvals for loans, they’re much more stringent when you’re applying for a mortgage now than it was pre-crash. If you’re one of my peeps out there and you’re an Uber real estate financial nerd, then that means you’ve probably heard the term non-QM loans. It’s a new term that’s being thrown around right now, and it’s starting to put some of the super nerdy people who follow this stuff into a super panic. People say, “Here we go again. We’ve taken over. Subprime is back just with a new name.”
I get it. I understand why there’s a derogatory stigma attached to this potentially happening all over again. Nobody wants that. Yes, in some ways, non-QM loans, that’s the substitute term for subprime loans. That term or this new replacement term, a non-QM loan, it’s going to scare the pants off of anybody who knows their history. Watch the Big Short if you haven’t.
Before the Great Recession of 2008, mortgage lenders had far more flexibility to extend home loans to people with less desirable qualifications. Think low credit scores, high levels of debt, and sometimes even non-existent incomes. I know it sounds crazy, but unverified income, and you could get a home loan because the Wall Street gang was falsely inflating on any loan because someone thought, “Housing was going up and that’s going to keep going forever, right? It never goes down.” Genius move, gang.
The reason I feel more comfortable this time around as we sink into the latest recession since Qualified Mortgages have been the norm for over a decade, a decade that saw serious growth for all new buyers since 2012. Thanks to everybody freaking out about it, and the government actually coming in and changing things. Government overwatch actually helped to change the lending rules.
For those of you hardcore financial nerds who cringe when I say ‘government overwatch,’ chill just a little bit. I like government protection and regulations on subprime lending, and you should too. As far as other government monetary and fiscal policies that printed money and let this most recent run up go unchecked without a pressure release, that’s another story. I’m not down with that. When it comes to regulating the out-of-control predatory lending, cool.
Understanding all of that, understanding how people got their loans to where we are right now, that matters to you because as you look at where we are right now, where we’re probably going, there should be some changes in your big picture strategies. Buying a home is not all location, location, location. It’s much more planning, options, and then timing, timing, timing, and then location. Know the history, and you can make better choices for you and your family’s best strategies.
Non-QMs used to be called subprime, 500 credit scores, mountains of debt, and you simply told them verbally what your income is. No verification. Seriously, nobody saw the flaw on that? Those greedy people, their sweet plan they had in place was that in return for approving these mortgages for these folks, the lenders would attach higher interest rates to the loans and that would mean everyone was going to work out fine. Nice move, morons.
That collapsed. Congress enacted those sweeping changes to a wide variety of industries. Some of the things that played a role in that financial crisis adjustment and fixing period were the Dodd–Frank Act, which led to the creation of the CFPB, the Consumer Financial Protection Bureau. The CFPB in turn established all those rules to prevent consumers from taking out those subprime mortgages they can’t afford. This was the birth of Qualified Mortgages, and something called the Ability-To-Repay/Qualified Mortgage Rule. That’s the ATR/QM Rule. That states that a lender must make a good faith determination about a borrower’s ability to repay the loan before extending a residential mortgage.
Once again, we really had to make this a rule? That includes that they have to do the things that you should have done in the first place. Checking your bank statements, your employment status, checking your revolving debt, and much more. Congress had to step in 10 or 12 years ago to make sure that the banks were only loaning to people that had the ability to repay their loans. The rule was called Ability-To-Repay, ATR, like that wasn’t a prerequisite for years anyway.
Technically, the mortgages, over the last decade or so, have put us in a situation where we’re not going to have housing be the demise of our economy. This is definitely not to say that this has anything to do with rising high inflation or the economy in general just taking a nose dive, maybe not just here in North America but maybe globally. Housing is not going to be the impetus or the driving force this time. Expect more of a traditional housing slowdown versus the housing meltdown that happened the last time the prices took off like this. Likely, the economy in general is going to be the one that’s going to do a little pressure release and possibly meltdown.
The QM has given us more stability, and at the same time we are seeing some non-QM loans pop up those new subprime loans with a different name, and that’s freaking people out. That does not mean that these new non-QM loans are all bad. That’s the reason I bring it up to you because the good news is nobody can just run out and get them anywhere like the candy they were giving out in the pre-crash times.
The reason it’s important to you is because some lenders are still offering this new product, this non-Qualified Mortgages. The reason they are is because they have looser guidelines for verifying income, for reviewing existing the debt, and for conducting other probing financial checks. I know that sounds bad and it sounds like we’re going to get ourselves in the same problem we had before, and probably some of you guys out there have your butt cheeks puckering up a little bit and you think, “We’re going to crash again.” No. The sky is not falling right here. They’re doing this for a very particular reason because there are some cases when it does make sense for you as the borrower to use a non-QM loan for a purchase.
I get a lot of questions from W-4 employees that tell me all the time that these new QM rules are shutting them out, and they haven’t been able to buy in the last ten years. They say, “David, I’m self-employed, and I can’t meet the requirements to get a home loan.” I get it, I understand that. Maybe you’re not able to get a QM loan, but these new non-QM loans are made just for you. To let you know I really know what I’m talking about, most realtors need to use them themselves because they’re self-employed. 1099, baby.
It can be done. The non-QM loans for this are not going to get you into trouble, but you need to ask and understand everything about it and get the creative solutions. If your income fluctuates pretty significantly for month to month, the uptight bean counters of the bank, they suddenly think that you are irresponsible. Do I agree with them? No way. The old guard is slow to change their ways and them’s the rules that you’ve got to play by if you want to get a home loan. You’re going to get some people that tell you, “No dice. You can’t qualify for a regular QM.” Not so fast, my friend. You’ve got the non-QM at your disposal. They’ve got more flexible financial verification processes.
I know hundreds of unicorns who have been using non-QM loans to help their first-time buyers get a deal that still works for them. Don’t believe the Debbie Downers, the Negative Nancys, and the Fearful Freddies. Find a pro with experience to lead you through your options. QM, non-QM, talk to a pro.
Our next Q, which is our final Q because nobody likes that stupid letter, is Qualifying Ratios. You might hear about this when you’re getting a baseline for your loan approval because there are two main calculations that are used when they’re determining whether a borrow can qualify for mortgage or not qualify.
The first Qualifying Ratio is the old housing expense as a percentage of your income ratio. That’s one that people use a lot. The second one is one we’ve talked about a lot on the show, the DTI, your Debt-To-Income ratio. That’s your total debt obligations as a percentage of your income. Important stuff to know when you’re qualifying for a loan.
How did we do? Are you all stretched out, warmed up, ready to go, ready to hit the machines or the weights? My goal is to help you avoid injury on the machines and the weights, and of course in the home buying process. Funny how that works. To avoid problems in anything in life, you should just prepare. You can do this.
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