Non-QM Loans
Non-Qualified Mortgage (non-QM) loans are types of loans designed for borrowers who may not meet the strict underwriting criteria of traditional, or "qualified", mortgages.
Why are they called non-QM?
Qualified Mortgages (QM) adhere to specific rules set by the Consumer Financial Protection Bureau (CFPB) to ensure the borrower's ability to repay the loan.
Non-QM loans do not strictly conform to these rules, offering more flexibility in the approval process. This doesn't inherently make them riskier for the borrower or the lender, but it allows for alternative methods of assessing a borrower's ability to repay.
Thes programs offer “Alternative Income Verification”:
Instead of relying solely on W-2s and pay stubs, Non-QM lenders may accept alternative forms of income documentation, such as bank statements, investment account statements, 1099s, or even asset-based qualification.
Who benefits from non-QM loans?
Non-QM loans can be a good option for individuals with unique financial situations, such as:
- Self-employed borrowers: Their income can be harder to document with traditional methods like W2s. Non-QM lenders may accept bank statements to verify income.
- Borrowers with past credit issues: Non-QM loans might be available sooner after a bankruptcy or foreclosure compared to traditional loans.
- Real estate investors: Non-QM options like DSCR loans allow qualification based on a property's rental income, not just personal income.
- High-net-worth individuals: These borrowers may have substantial assets but less traditional income, which non-QM lenders can consider.
- Foreign nationals: Non-QM loans can cater to individuals who are not U.S. citizens but reside here for work or other reasons.
Potential advantages of non-QM loans:
- Flexible income verification: Non-QM loans offer alternative documentation options, such as bank statements, for income verification.
- Faster approval after credit events: Some non-QM lenders may approve loans sooner after a bankruptcy or foreclosure compared to traditional lenders.
- Higher debt limits: Non-QM loans may allow for higher debt-to-income (DTI) ratios than the 43% limit typically associated with Qualified Mortgages.
Potential Trade-offs:
While offering flexibility, Non-QM loans often come with trade-offs. Borrowers may encounter:
- Higher interest rates: Non-QM loans often come with higher interest rates than traditional mortgages due to the increased risk profile for lenders.
- Higher down payment requirements: Often ranging from 15% to 20% or more as compared to conventional loans.
- Potentially higher closing costs:
As compared to traditional, qualified mortgage (QM) loans.
Such as:
Higher origination fees and points: as lenders seek to offset the increased risk involved.
Risk-Based Pricing: Lenders use risk-based pricing models, meaning borrowers with lower credit scores or less stable financial profiles may face even higher fees and interest rates.
- Potential prepayment penalties: Some non-QM loans may include prepayment penalties.
- Fewer consumer protections: Because they don't adhere to all QM guidelines, non-QM loans lack some of the consumer protections associated with Qualified Mortgages.
It's crucial to carefully evaluate your financial situation and understand the terms and conditions of any non-QM loan before committing to it.
Following are some Non-QM Loan Options that are available:
