Mortgages are not one-size-fits-all. If you don’t fit the description of the typical borrower, a non-qualified mortgage (QM) might be your answer to financing a home.
What Are Non-QM Loans?
In order to define non-QM loans, you have to first understand what qualified mortgages are. A qualified mortgage is a mortgage that is granted based on the borrower’s ability to meet government standards. These standards are based on the borrower’s ability to repay their mortgage according to their financial record.
Every mortgage lender has a responsibility to follow the ability-to-repay rule and make an effort to ensure you’ll be able to repay your mortgage. Lenders who issue qualified mortgages do that by following the general requirements laid out by the Consumer Financial Protection Bureau, which include:
- Declining to issue loans with risky features, such as:
- Repayment terms of more than 30 years
- Interest-only periods: When you pay only interest and no principal on a loan for a period of time
- Balloon payments: When you owe a larger than normal payment at the end of a loan term
- Negative amortization: A situation in which your loan principal increases even though you’re making payments
- Placing caps on fees and points: Limits on the upfront points and fees the borrower will have to pay the lender, depending on the size of the loan
- Limiting debt-to-income ratios: Limits on how much of your income can go toward paying off debts, including your mortgage
Who Should Consider a Non-QM Loan?
If you don’t fit the mold of the traditional borrower, but you’re confident you have the means to repay a mortgage, you should consider a non-QM loan. If you count yourself among one of the following groups, a non-QM loan might be for you:
When a seller accepts an offer on their house, everything the buyer and seller have agreed upon will start to play out in more or less this order:
- Self-employed borrowers
- Real estate investors
- Foreign nationals
- Non-prime borrowers
- Borrowers with substantial assets
If you’re self-employed, it can be tricky to prove your income on a typical mortgage application because your income stream may not be as steady as someone with a typical 9-to-5 job. With a non-QM loan, you can typically use documents like bank statements rather than W-2s to prove your income.
Real estate investors might also be drawn to non-QM loans if they fix and flip homes within a short span of time, need financing quickly, and can benefit from loans with attractive introductory rates.
Foreign nationals sometimes opt for non-QM loans if they have a low or non-existent U.S. credit score and can’t qualify for a traditional mortgage. Likewise, if you are a U.S. citizen but your credit score isn’t pristine, a non-QM loan can allow you to make up for that in other ways, such as a larger down payment. And if you have substantial assets but don’t want to buy a property outright, you might consider the non-QM asset qualifier loan program in order to finance a home while maintaining a positive cash flow.
What Else Should You Know About Non-QM Loans?
Non-QM loans have the advantages of customization and flexibility, perhaps at the expense of stability and lower interest rates. Non-QM borrowers can use a variety of income types as proof of their ability to repay, or take out a loan with risky features, such as a repayment term lasting more than 30 years or an interest-only payment option.
Because non-QM loans are typically considered riskier than QM loans, it’s possible you will have higher interest rates or a larger down payment, but that will depend on your situation. And although non-QM loans have more underwriting flexibility in terms of the types of income documents they accept, the underwriting process might actually be more thorough than qualified mortgage underwriting.
It’s always important to shop around when selecting a mortgage and lender—but that’s especially true when it comes to non-QM loans, because interest rates and customer care can vary substantially from lender to lender. It’s also important to note that not every lender offers non-QM loan products. Some lenders choose to grant only qualified mortgages, in part because doing so offers certain legal protections.
Learn More About Mortgage Preparedness
Whether you’re considering a qualified or non-qualified mortgage, your home-buying journey will be much more successful with a bit of preparation. Discover more tips from experienced loan officers about how to navigate the home-buying process in our mortgage preparedness e-book.