Non-QM Loans: What is a Non-Qualified Mortgage?
A non-QM loan, or non-qualified mortgage loan, is meant for homebuyers who may not qualify for a qualified loan. These buyers may be missing documents. They may be self-employed. Or they may have potential issues with their credit but still want to achieve the goal of homeownership.
Continue reading to learn more about non-QM loans and the key differences and benefits. You can also start your application and begin your journey to a new home.
What is a non-QM loan?
A non-QM loan is a type of mortgage loan that does not meet the criteria for a qualified mortgage (QM) as set forth by the Consumer Financial Protection Bureau (CFPB).
Non-QM loans are not subject to the same standards and regulations as qualified loans. Qualified loans are intended to ensure that borrowers have the ability to repay their loans. Non-QM loans may have different underwriting criteria.
These types of loans may allow for higher debt-to-income ratios or considering alternative documentation of income. They may also have higher interest rates or fees to offset the increased risk for the lender.
Non-QM loans may be offered to borrowers who do not meet the strict requirements of a qualified loan. For example, homebuyers with self-employment income, high net worth or a history of credit issues may not qualify for certain loan types. For this reason, borrowers should carefully consider the terms and potential risks before choosing this loan type.
How do non-qualified mortgages work?
Non-qualified mortgages (non-QM) work differently from qualified mortgages (QM). QM loans are subject to strict underwriting criteria set by the Consumer Financial Protection Bureau (CFPB). These restrictions ensure that borrowers can repay their loans. In contrast, non-QM loans have more flexible underwriting criteria and are typically offered to borrowers who do not meet the strict standards of a QM loan.
Non-QM loans may have higher interest rates and fees because they are considered riskier than QM loans. However, they may also offer benefits such as lower down payment requirements or more lenient credit score requirements. Non-QM loans may also consider alternative sources of income, such as self-employment income, rental income or investment income that may not be counted towards a borrower's income for a QM loan.
What’s the difference between a non-QM loan and a DSCR loan?
Non-QM loans and DSCR (Debt Service Coverage Ratio) loans are both types of mortgage loans, but they are designed for different types of borrowers and have different underwriting standards.
Non-QM loans are for borrowers who do not meet the underwriting standards for traditional qualified mortgages. These borrowers may have non-traditional income sources or have a high level of debt compared to their income, making it difficult to qualify for a QM loan.
On the other hand, DSCR loans are designed for real estate investors who want to finance income-producing properties. DSCR stands for debt service coverage ratio, which is a measure of the property's ability to generate enough income to cover its debt service payments. DSCR loans require borrowers to meet a minimum DSCR threshold, typically around 1.00, which means that the property's net operating income must be at least 100% of its debt service payments. DSCR loans are considered to be a more conservative form of lending because they focus on the property's income-generating ability rather than the borrower's creditworthiness.
In summary, non-QM loans are designed for individual borrowers who do not meet the underwriting standards for traditional mortgages while DSCR loans are designed for real estate investors who want to finance income-producing properties based on the property's income-generating ability.
Who qualifies for a non-QM loan?
Non-QM loans are generally designed for borrowers who do not meet the strict requirements of a qualified mortgage (QM). These loans are often used by self-employed individuals, those with fluctuating incomes or borrowers with credit issues. However, the specific requirements for a non-QM loan may vary depending on the lender and the type of loan being offered.
Buyers who benefit may include those with non-traditional income sources:
- Self-employed/contractors with 1099, personal or business bank statements and P&L (Profit & Loss) statement in lieu of tax returns
- Property investors with cash-flow from rental income
- High-net worth borrowers with substantial assets (stocks, bonds, funds from large settlements, savings, inheritance or retirement)
- ITIN (Individual Taxpayer Identification Number) borrowers with 1099, personal or business bank statements
Here are some general criteria that may be considered for a non-QM loan:
General criteria used to qualify for a non-QM loan
- Credit Score
While non-QM loans may be offered to borrowers with lower credit scores, some lenders may have minimum credit score requirements. - Debt-to-income ratio
Non-QM loans may allow for higher DTI ratios than QM loans. However, lenders will still want to ensure that the borrower has the ability to repay the loan. - Income verification
Non-QM loans may allow for alternative methods of income verification, such as bank statements, tax returns or asset-based income. - Employment history
Lenders may consider a borrower's employment history and stability in determining their ability to repay the loan. - Property type
Non-QM loans may be available for unique or non-traditional properties. Investment properties, mixed-use properties or properties in need of repair may be considered for a non-qualified mortgage. Non-QM loans may have higher interest rates and fees than other mortgage types. This is due to the higher risk associated with non-QM loans. Borrowers should carefully consider the terms and potential risks of a non-QM loan before choosing this type of loan.
Where can I apply for a non-QM loan?
We can help start you on the path to a non-QM loan today. Begin by applying online and our team will help you through the mortgage process and provide the support you need.
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