Many homebuyers do not have the standard or consistent forms of income that are typically required by mortgage lenders. Yet, while they may not be able to qualify for conventional loans for various reasons, these buyers may still have enough income or assets to afford homeownership. In these situations, a non-qualified mortgage (non-QM) may be the solution.

What is a Non-QM loan?

In order reduce risk of loss after the mortgage meltdown in 2008, federal regulators tightened borrower requirements on mortgage loans that could be backed and bought by government agencies. Loans that meet all the new criteria are called “qualified mortgages.” Any loan that falls outside of those qualifications is called a “non-qualified mortgage” or non-QM.

A non-QM is a mortgage loan that uses alternate methods to verify income to qualify borrowers. Even though these loans do not meet the standard requirements, they are not necessarily riskier loans. All borrowers are still required to prove their ability to repay the loan. Because there is more work required to process non-QM loans, the interest rates tend to be anywhere from 0.5% to 5% higher, depending on the loan terms.

Who Do Non-QM Loans Help?

Non-QM loans are often a good fit for those who have unique income situations:

  • Self-employed borrowers

    Self-employed individuals often have irregular income that may come from several sources. They can often qualify for a non-QM loan using bank statements rather than tax returns.

  • Borrowers with considerable assets

    Some buyers who can buy a home with cash prefer to take out a non-QM loan to finance their purchase in order to maintain a positive cash flow.

  • Real estate investors

    Those who buy homes expressly to flip them for profit or turn them into rental properties often use non-QM loans. This is because of the quick turnaround or because the qualifying income will come from the projected rent.

  • Foreign buyers

    Borrowers from other countries may not have a U.S. credit score to help them qualify for a traditional loan. As long as these foreign buyers have high income, substantial assets and down payments, they can usually obtain a non-QM loan.

  • Buyers with blemished credit histories

    Non-QM loans can also be helpful for those with sufficient income but credit issues like prior bankruptcy, foreclosures or not enough credit history.

What are the Benefits of Non-QM Loans?

The benefits of Non-QM loans include the following:

  • They provide mortgage funding for those with non-traditional income or financial situations.

  • They allow for loans up to $2.5 million.

  • Fixed-rate and adjustable-rate non-QM mortgages are available.

  • Non-QM loans close just as quickly as conventional mortgages.

  • They can be made to legal entities, like family trusts, instead of just individuals.

  • No mortgage insurance is required on non-QM loans.

  • They can be used to free up cash for investments.

  • Non-QM cash-out refinance loans allow borrowers to take as much as $500,000 out in equity, depending on the situation.

What Documentation is Required for Non-QM Loans?

The documents required will vary greatly based on the financial situation of the applicant. In order to verify income, you can provide either personal and business tax returns or bank statements or investment account statements. In some cases, income verification is not even necessary. Credit scores and debt-to-income ratios will be factored in. Non-QM loans take a more holistic approach to an applicant’s financial situation though, rather than relying on a standard underwriting matrix.

What Types of Non-QM Loans Are Available?

Non-QM loans employ non-standard mortgage terms in order to help borrowers qualify. These include loan terms longer than 30 years, interest-only loans, higher debt ratios or alternate income verification methods. Non-QM loans can be used for primary residence mortgages, refinance loans, cash-out refinances, and investment property loans.

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FAQs

What is the difference between pre-approval and pre-qualification?

The pre-approval process is much more complete than pre-qualification. For pre-qualification, the loan officer asks you a few questions and provides you with a pre-qual letter. Pre-approval includes all the steps of a full approval, except for the appraisal and title search. Pre-approval can put you in a better negotiating position, much like a cash buyer.

When does it make sense to refinance?

Usually, people refinance to save money either by obtaining a lower interest rate or by reducing the term of the loan. Refinancing is also a way to convert an adjustable loan to a fixed loan or to consolidate debts. The decision to refinance can be difficult, since there are several reasons to refinance. However, if you are looking to save money, try this calculation: Calculate the total cost of the refinance Calculate the monthly savingsDivide the total cost of the refinance (#1) by the monthly savings (#2). This is the "break even" time. If you own the house longer than this, you will save money by refinancing. Since refinancing is a complex topic, consult a mortgage professional.

What is a rate lock?

A rate lock is a contractual agreement between the lender and buyer. There are four components to a rate lock: loan program, interest rate, points, and the length of the lock.

What is the difference between a mortgage broker and a lender?

A mortgage broker counsels you on the loans available from different wholesalers, takes your application, and usually processes the loan which involves putting together the complete file of information about your transaction including the credit report, appraisal, verification of your employment and assets, and so on. When the file is complete, but sometimes sooner, the lender "underwrites" the loan, which means deciding whether or not you are an acceptable risk.

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step of the way.

Let’s Turn Your Homeownership
Dream Into Reality

Start your journey today by getting a free quote, It's fast, simple, and connects you with a dedicated loan expert ready to guide you every step of the way.

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