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Non-QM Loans – What Are They?

A qualified-mortgage also known as a QM mortgage are the traditional mortgages that lenders offer. For example, conventional loans, FHA loans, VA Loans, etc..

A non-qualified mortgage also known as Non-QM are mortgages that are considered to be “outside the box” mortgages.

Non-QM loans have flexible credit and financial requirements and are perfect for self-employed borrowers, real estate investors, and anyone else who doesn’t meet the traditional mortgage requirements.

Non-QM vs QM

In order to get a traditional QM loan, home buyers will need to provide a great deal of information and need to meet certain requirements in order to get a loan. These are all necessary for a “qualified mortgage”:

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QM: Traditional Mortgage Qualifications

  • You must have verifiable income (also known as the “ability to repay” rule)
  • You must have a low debt to incme ratio
  • The length of the loan has a maximum amount of 30 years
  • Any points or fees cannot exceed 3% of the loan’s amount
  • You must have an acceptable credit score and credit history
  • The loan can’t have any risky features. This might be with balloon payments when a larger payment is at the end of the loan, or interest-only loans when the principal isn’t reduced with payments or negative amortization when principal can actually increase even as payments are being made.

Qualified mortgages, or traditional mortgages, are the most common type of home loan. They protect lenders by requiring certain criteria that borrowers must meet. The criteria includes a term of 30 years or less, adequate verifiable income, a low debt-to-income ratio, low points and fees, and no risky loan features.  

What if a home buyer cannot meet traditional QM restrictions?

That’s when a NonQM loan comes into play.

As the name implies, a non-qualified mortgage doesn’t comply with the same needs as a qualified mortgage.

For example: Self-employed professionals, may have a difficult time meeting traditional loan requirements. 

If you write off all your income at the end of the year, you may run into issues with income verification for a traditional mortgage.
 
Because non-QM loans come with more flexible income verification processes, it would be easier to get a mortgage going this route.

When can a Non-QM Loan be beneficial?

A non-qm mortgage helps borrowers who might not fit the average person’s circumstances.

For home buyers who are self-employed or rely on bonuses or stock options for a hefty amount of their income, this type of loan is a great option.

It’s also the only option for foreign nationals or real estate investors with ten or more properties. It gives them the ability to still obtain a mortgage even under special circumstances.

A major advantage of Non-QM loans is that they open the door to borrowers who may not otherwise qualify for a home loan.

Non-QM Loan Benefits

  • Loan eligibility requirements are flexible, including credit scores and debt-to-income (DTI) ratios
  • Income can be verified with bank statements instead of tax returns.
  • Debt to income ratio can be as high as 55%
  • Credit scores can be as low as 600
  • You can get a home loan shortly after a bankruptcy discharge
  • You can get a mortgage shortly after a foreclosure
  • There is a 40 year mortgage that may allow you to qualify for more than you would on a 30 year mortgage
  • There are down payments as low as 5%
  • You don’t have to pay PMI (mortgage insurance)
  • Purchase rental property without having to verify income
  • Interest only options available

Non-QM Drawbacks

  • Higher interest rates
  • Reserves may be required
  • Down payment is required
  • Closing costs are higher than traditional mortgages.

Who Benefits from a Non-Qm Loan?

  • Borrowers with poor credit history. If you’ve had a foreclosure, or a bankruptcy, or just had a bad year and were unable to keep up with your bills.
  • Borrowers who are unable to provide sufficient income documentation. If you are self-employed or work in fields that, by their nature, do not produce a steady financial paper trail. For instance, uber drivers, musicians, business owners, or a contractor.
  • Borrowers with high debt. If you have a high debt ratio you may have a hard time getting a traditional mortgage. A NonQM mortgage allows for higher debt-ratios.
  • Borrowers who want a longer loan term. Traditional mortgages are capped at a 30 year loan term. Non-QM can go as high as a 40 year term.
  • Borrowers who are looking for a large loan amount. Non-QM loans allow financing up to $4million.
  • Borrowers who are real estate investors. The investment property loan doesn’t require income information.


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