If your income or credit history falls outside the stringent guidelines set by standard mortgage loan programs, a non-QM loan may be worth considering. Non-QM is short for non-qualified mortgage, and understanding how non-QM loans work may help you decide if they’re a worthwhile financing option for you.
Non-qualifying mortgage loans also known as non-QM or non-qualified mortgages provide home financing options for borrowers who don’t fit the strict criteria for a conventional or government-backed mortgage. With some flexible guidelines, these loans open doors for buyers who’ve faced financial challenges, have complex income situations, or simply want non-traditional loan features.
What Makes a Mortgage Non-Qualifying?
After the subprime mortgage crisis the Consumer Financial Protection Bureau established an “ability-to-repay” rule for most mortgages. Lenders must verify a borrower’s income assets, employment, credit history and other key factors to prove their ability to repay the loan. Loans meeting these requirements are qualified mortgages (QM).
Non-qualifying mortgages don’t adhere to all the criteria for QM loans. While lenders still assess a borrower’s ability to repay, non-QM guidelines allow more flexibility
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Income verification may be based on bank statements rather than tax returns. This helps self-employed borrowers or those with irregular income.
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Higher debt-to-income (DTI) ratios may be allowed. Non-QM lenders may approve DTIs above 43-50%, which are common caps for conventional loans.
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Credit scores and history requirements are loosened. Applicants can get approved soon after bankruptcy or foreclosure.
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Loan terms beyond 30 years are possible. This further reduces monthly payments.
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Interest-only payments or negative amortization may be options. This increases payment flexibility but also risk.
Essentially, non-QM lenders look at the full picture of a borrower’s financial situation, not just standardized qualifying criteria. This opens mortgage possibilities for those unable to get a QM loan.
Who Might Benefit from a Non-Qualifying Mortgage?
Non-QM loans serve niche borrower groups who want home financing but have scenarios unmet by conventional mortgage requirements. Some examples include:
Self-Employed Borrowers
Verifying income for the self-employed is challenging with tax returns alone. Non-QM lenders may approve loans based primarily on bank statement deposits over 12-24 months. This also helps workers with 1099 income or recent startups not yet filing taxes.
Investors and Real Estate Developers
Conventional mortgages limit investors to 10 financed properties. Non-QM programs exist for larger-scale investors with 11+ properties. Commercial real estate developers may use non-QM loans for constructing or rehabbing properties.
Foreign Nationals
Foreigners with U.S. property investments can obtain non-QM mortgages without needing income verification, Social Security numbers or U.S. credit history. Requirements depend on visa type.
Borrowers with Credit Challenges
Those facing foreclosure, bankruptcy, collections or delinquencies often can’t get approved for 6 months to 7 years. Non-QM lenders may offer loans within days or months of these credit events.
Retirees and Asset-Rich Borrowers
Some non-QM loans allow asset balances to supplement or replace income requirements. This aids retirees or high-net-worth buyers with substantial savings and investments.
Purchasers of Non-Conforming Properties
Unique property types like houseboats and earth homes fall outside conventional lending guidelines. Non-QM loans provide financing options based on appraisals of these non-conforming dwellings.
Borrowers Seeking Nontraditional Loan Features
Non-QM mortgages may offer interest-only payments, 40-year terms, high balances, or options not provided by typical lenders. This expanded product flexibility suits some borrowers’ repayment needs or preferences.
The Pros and Cons of Non-Qualifying Mortgages
Non-QM loans provide solutions where conventional mortgages fall short, but they also have some drawbacks to weigh.
Potential Advantages:
- More flexible qualifying guidelines
- Alternative income documentation methods
- Loan approval soon after major credit events
- No limits on investment property purchases
- Interest-only payments or longer terms possible
Potential Disadvantages:
- Higher interest rates and upfront costs
- Increased lending risks for some products
- Tighter availability than conventional mortgages
- Difficulty refinancing into standard mortgages
- Higher down payment requirements
The additional costs and risks mean non-QM loans work best as a temporary option until the borrower qualifies for a traditional mortgage. However, the loans open doors for many who’d otherwise face denial.
Where to Find Non-Qualifying Mortgage Lenders
Non-QM mortgages come primarily from specialized lenders rather than big banks and credit unions. Many non-QM lenders focus on specific niches like foreign nationals, investment properties, or low credit borrowers. Partnering with an experienced broker familiar with these lenders can help find the right match.
Online marketplaces like LendingTree also let applicants compare customized preapproval offers from competing non-QM lenders. Comparing multiple offers makes it easier to shop for the best rates and terms.
While non-qualifying mortgages come with trade-offs, they provide mortgage access by valuing the full picture of a borrower’s financial life. For homebuyers with scenarios unmet by conventional lending standards, non-QM products offer creative financing solutions where others fall short. The key is researching multiple lenders to find the ideal option for each borrower’s unique situation and goals.
Who benefits from non-QM loans?
Non-QM loans are handy for people who have found their dream home but were denied a home loan under qualified-mortgage standards. A non-qualified mortgage may provide a temporary lending solution until you meet regular mortgage guidelines and can refinance to a traditional loan.
Non-QM lenders offer options for:
While standard loan programs require tax documents to prove your self-employed income, non-QM lenders may offer bank statement mortgages with no need for filed tax paperwork. The lender evaluates deposits based on 12 to 24 months’ worth of personal or business statements to determine your qualifying income.
Some lenders allow you to divide the total cash balance in an asset account by a lender-chosen time period and use the result for qualifying income. This is known as an asset depletion loan. For example, a $200,000 savings balance may be converted into $833.33 of extra monthly qualifying income with a typical 20-year asset depletion loan term.
Non-QM loans may be a good choice for investors who own more than 10 financed investment properties — the limit for most conventional lenders. Other non-QM lenders offer debt-service coverage ratio loans for real estate investors. If the rent on the new home covers the monthly payment, you don’t need other income to qualify.
You may be eligible for a non-QM loan one day after completing a bankruptcy or foreclosure. You typically need to wait two to seven years after a significant credit event for standard loan programs.
A foreign national is a citizen of another country who lives in the U.S. for brief periods for work or vacation. Non-QM loans for foreign nationals may not require proof of U.S. income, credit or a Social Security number.
Sporadic income-earners may benefit from an interest-only loan that allows for a lower payment option during times of the year when they earn less. One caveat: Your payment could increase after the interest-only period ends, making the loan harder to repay.
What are non-QM loans?
Non-QM loans are mortgages that don’t meet the Consumer Financial Protection Bureau’s (CFPB) requirements to be considered qualified mortgages. A qualified mortgage meets the CFPB’s “ability to repay” rule, which requires that lenders vet your finances and set terms on the loan that you’re likely to be able to pay back.
Some features of non-QM loans include:
Risky features. To help you qualify for a non-QM, loan the lender may include one or a combination of the following features:
- Interest-only payments. Lenders that offer an interest-only option don’t require you to pay any of your loan balance down but instead just pay the interest accruing each month.
- Negative amortization. Although this is very rare, you may come across a lender that allows you to make payments for less than the interest charged each month. In this case, your loan balance grows, called “negative amortization” in loan terms.
- Balloon payments. You’ll make a larger-than-usual payment at the end of a set time if your non-QM loan has a balloon payment.
- Longer loan term. You may find a non-QM lender that offers terms longer than 30 years.
Higher-priced loans with upfront points and fees. To offset the higher risk lenders take making non-QM loans, you’ll likely pay higher rates, APRs and even upfront fees and points that aren’t permitted on qualified mortgages.
Flexibility with your income or credit history. While a standard QM loan requires you to verify your income with tax returns, W2s and paystubs, a non-QM lender might be able to use your bank statements to calculate income to qualify for your loan. Non-QM lenders often offer programs that allow you to borrow within days of a major recent credit event like a bankruptcy or foreclosure. You won’t have to wait the two to seven years required by qualified mortgage loan programs.
Non-QM loans are not like subprime loans from the last housing crisis. Lenders must make a good-faith effort to verify you can repay the loan. However, non-QM lenders can create their own guidelines to prove you can afford the monthly mortgage payments.
How to Apply for a Non-Qualified Mortgage? (What Are Non-QM Loans?)
FAQ
Which of the following is not a qualified mortgage?
What credit score do you need for a non QM loan?
Do non QM loans require mortgage insurance?
Is a bank statement loan a non-QM loan?
Should I get a non-QM mortgage?
If you fall below a lender’s credit threshold, a non-QM loan can seem to be an appealing alternative. People with high debt. Lenders typically refuse to give mortgages to anyone with a DTI higher than 50%. Digging out of that much debt can take years, which may just delay homeownership dreams even further.
What is a non-qualifying mortgage?
A non-qualifying, or non-QM, loan doesn’t meet the Consumer Financial Protection Bureau’s requirements for qualified mortgages. These mortgages can help those with unusual financial situations or rocky credit histories purchase a home.
Is a non-qualified mortgage a good fit?
Depending on the type of mortgage you’re interested in and the specific loan terms you’re looking for, a non-qualified mortgage may be a good fit for you. A non-qualified mortgage — or non-QM — is a home loan that is not required to meet agency-standard documentation requirements as outlined by the Consumer Financial Protection Bureau (CFPB).
What is the difference between a qualified and a non-QM mortgage?
Higher debt limits. Qualified mortgages have a maximum debt-to-income ratio (the percentage of your income that goes toward monthly debt payments) of 43%, while some non-QM loans allow for ratios over 50%. Higher down payment requirements. Non-QM loan borrowers may be required to put a minimum down payment of 10% to 20%.