A non-qualified mortgage provides an alternative if you want to buy a house but are concerned that you won’t be approved for a conventional mortgage. Here, we’ll explain how a non-qualified mortgage operates and assist you in determining whether one is the best option for you.
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A non-qualified mortgage provides an alternative if you want to buy a house but are concerned that you won’t be approved for a conventional mortgage. Here, we’ll explain how a non-qualified mortgage operates and assist you in determining whether one is the best option for you.
What is a non-qualified mortgage?
The goal of a non-qualified mortgage (non-QM) is to assist homebuyers who cannot meet the stringent requirements of a qualifying mortgage. Consider non-qualified mortgages, for instance, if you are self-employed or lack the required documentation to be approved for a traditional mortgage.
Examining the requirements for conventional, qualifying mortgages is the best way to comprehend a non-qualifying mortgage. In order to be eligible for a conventional mortgage, you must:
If none of the aforementioned requirements apply to you, you should research non-qualifying mortgages.
Basically, mortgage lenders must be aware of your capacity to repay your loan. The above regulations also protect buyers from risky loans. The Dodd-Frank Wall Street Reform Act and the 2010 Consumer Protection Act both include these minimal requirements for qualifying mortgages.
In the years preceding the Great Recession, lenders appeared to be willing to approve mortgages for anyone with a pulse, including those with bad credit and little down payment. Some mortgages did not verify income at all. Unreliable lenders would force homebuyers into unaffordable mortgages. One of the reasons the recession hit so hard was this willy-nilly strategy. Millions of borrowers with mortgages were unable to make their payments.
Currently, lenders are protected from liability as long as they adhere to these stringent lending guidelines. Borrowers cannot claim that a lender knew they couldn’t make the required monthly payments later (as many did during the Great Recession).
Government organizations like the FHA, VA, Fannie Mae, and Freddie Mac do not support non-qualified mortgages.
Pros and cons of a non-qualified mortgage
There is a lot to consider when choosing a mortgage. Here’s a quick summary of the benefits and drawbacks of a non-QM
| Pros | Cons |
|---|---|
| Enables buyers with low credit scores to qualify for a mortgage | Interest rate and fees may be higher on a non-QM loan |
| Requires less stringent income documentation | Non-QMs can be more difficult to find |
| Application process is nearly identical to qualifying mortgages | Non-QMs cannot be sold to Fannie Mae and Freddie Mac |
One of the main advantages of a non-QM loan is that it makes it possible for buyers with bad credit to buy a house. People who are self-employed, own their own businesses, or hold unconventional jobs are exempt from providing proof of income. Nearly as simple to apply for as a conventional loan are non-QMs.
Should I get a non-qualified mortgage?
When you have the means to make consistent, on-time mortgage payments but are unable to obtain a qualifying mortgage, a non-QM is a good option.
Imagine that you own a contracting business. Your income varies from month to month, depending on how much is earned. You have no way of knowing with certainty how much money you will make each year. However, you have no trouble paying your bills, a good credit rating, and cash in the bank. Despite having a sound financial situation, you are unable to check the “income verification” box necessary for a qualified mortgage. Thats where a non-QM comes in.
The following types of borrowers could profit from a non-QM loan:
Non-QMs demonstrate that a variety of homebuyers can qualify for mortgages. You can obtain a mortgage even if you have poor credit, a low income, or a high debt-to-income ratio.
It’s important to understand that non-QMs are not the same as subprime mortgages if you’re worried about whether they’re safe. There is a misconception that non-QM loans are subprime because of the Great Recession’s housing meltdown. In contrast, today’s non-QMs have their own set of requirements, just like qualified mortgages. In actuality, aside from the necessary loan documents, the lending process is similar. The “Ability to Repay Rule” is applicable to both types of loans. If a lender doesn’t take special care to make sure a borrower can pay back the loan, they risk lawsuits. A non-QM is as safe as other mortgages.
Where to find a non-qualified mortgage
Alternative to a non-qualified mortgage
You do have a backup plan if your credit is bad or it’s hard to prove your income. Consider an owner-financed property before giving up on your home-buying dreams. Consider looking for a home that the current owners are willing to finance if the circumstance that prevents you from getting a qualifying mortgage will pass in a few years (for instance, a bankruptcy will disappear from your credit report, or your DTI will be lower). You agree to terms, such as how long the owner will act as a lender and the interest rate you will pay. This is how it works. You pay the previous owners after making a down payment as opposed to a mortgage lender on a regular basis. If you don’t pay back the loan, the previous owner may take possession of your house just like a bank would.
Owner finance arrangements are not without risks. Typically, they also include a “balloon payment,” which is due three to five years from now. Then you apply for a conventional mortgage and use the money to fully compensate the prior owner. You begin making your monthly payments to the new lender as soon as the prior owner is no longer involved.
Make it a point to comparison-shop current mortgage rates if you’re looking for a non-QM loan to find the ideal mortgage for you. Finding the ideal loan can help you avoid paying thousands of dollars in interest over time.
Here are some other questions weve answered:
Ready for mortgage pre-approval?
An essential step in the home-buying process is getting pre-approved for a mortgage loan. Before you start looking at homes or choosing a real estate agent, our experts advise obtaining a mortgage pre-approval.
FAQ
What are examples of non-QM loans?
- Bank Statement Loans. For this kind of Non-QM loan, only a bank statement is needed.
- Jumbo Loans with 10% Down. …
- No Income Investment Loans. …
- Asset-Based Loans. …
- Foreign National Loans (ITIN) …
- Interest-Only Home Loans. …
- Recent Credit Event Loans. …
- Commercial Rental Property Loans.
What is the difference between a QM and non-QM mortgage?
A Non-QM loan uses different methods of confirming income than a QM loan, which is a significant difference between the two types of loans. To assist the borrower in receiving mortgage loan approval, use the common methods of income verification for a QM loan.
What is a non qualified mortgage loan?
A home loan that does not have to adhere to the Consumer Financial Protection Bureau’s (CFPB) agency-standard documentation requirements is known as a non-qualified mortgage, or non-QM. Home loans with terms longer than 30 years may fall under the category of non-QM loans.
What are the benefits of non-QM loans?
One of the main advantages of a non-QM loan is that it makes it possible for buyers with bad credit to buy a house. People who are self-employed, own their own businesses, or hold unconventional jobs are exempt from providing proof of income. Nearly as simple to apply for as a conventional loan are non-QMs.