Many homebuyers do not have the standard or consistent forms of income that are typically required by mortgage lenders. Yet, while they may not be able to qualify for conventional loans for various reasons, these buyers may still have enough income or assets to afford homeownership. In these situations, a non-qualified mortgage (non-QM) may be the solution.
What is a Non-QM loan?
In order reduce risk of loss after the mortgage meltdown in 2008, federal regulators tightened borrower requirements on mortgage loans that could be backed and bought by government agencies. Loans that meet all the new criteria are called “qualified mortgages.” Any loan that falls outside of those qualifications is called a “non-qualified mortgage” or non-QM.
A non-QM is a mortgage loan that uses alternate methods to verify income to qualify borrowers. Even though these loans do not meet the standard requirements, they are not necessarily riskier loans. All borrowers are still required to prove their ability to repay the loan. Because there is more work required to process non-QM loans, the interest rates tend to be anywhere from 0.5% to 5% higher, depending on the loan terms.
Who Do Non-QM Loans Help?
Non-QM loans are often a good fit for those who have unique income situations:
- Self-employed borrowers
Self-employed individuals often have irregular income that may come from several sources. They can often qualify for a non-QM loan using bank statements rather than tax returns.
- Borrowers with considerable assets
Some buyers who can buy a home with cash prefer to take out a non-QM loan to finance their purchase in order to maintain a positive cash flow.
- Real estate investors
Those who buy homes expressly to flip them for profit or turn them into rental properties often use non-QM loans. This is because of the quick turnaround or because the qualifying income will come from the projected rent.
- Foreign buyers
Borrowers from other countries may not have a U.S. credit score to help them qualify for a traditional loan. As long as these foreign buyers have high income, substantial assets and down payments, they can usually obtain a non-QM loan.
- Buyers with blemished credit histories
Non-QM loans can also be helpful for those with sufficient income but credit issues like prior bankruptcy, foreclosures or not enough credit history.
What are the Benefits of Non-QM Loans?
The benefits of Non-QM loans include the following:
- They provide mortgage funding for those with non-traditional income or financial situations.
- They allow for loans up to $2.5 million.
- Fixed-rate and adjustable-rate non-QM mortgages are available.
- Non-QM loans close just as quickly as conventional mortgages.
- They can be made to legal entities, like family trusts, instead of just individuals.
- No mortgage insurance is required on non-QM loans.
- They can be used to free up cash for investments.
- Non-QM cash-out refinance loans allow borrowers to take as much as $500,000 out in equity, depending on the situation.
What Documentation is Required for Non-QM Loans?
The documents required will vary greatly based on the financial situation of the applicant. In order to verify income, you can provide either personal and business tax returns or bank statements or investment account statements. In some cases, income verification is not even necessary. Credit scores and debt-to-income ratios will be factored in. Non-QM loans take a more holistic approach to an applicant’s financial situation though, rather than relying on a standard underwriting matrix.
What Types of Non-QM Loans Are Available?
Non-QM loans employ non-standard mortgage terms in order to help borrowers qualify. These include loan terms longer than 30 years, interest-only loans, higher debt ratios or alternate income verification methods. Non-QM loans can be used for primary residence mortgages, refinance loans, cash-out refinances, and investment property loans.