What is a Non-QM mortgage?
Non-QM stands for Non-Qualified Mortgage. These are loans for borrowers who may not meet the requirements of standard loan programs. Non-QM loans typically have a special income qualification. They are designed for people with unique income streams. Some examples would be individuals self-employed as an independent business owner, entrepreneurs, contractors, hospitality workers, retirees, actors, artists, etc.
A Non-QM loan does not meet the Consumer Financial Protection Bureau’s lending requirements. Particularly their requirement to vet the borrower’s income and set terms and conditions accordingly. This is why they are not considered to be Qualified Mortgages. However, just because they are not “Qualified Mortgages,” that does not mean that these loans are risky or unsafe for borrowers. It simply means that their credit profile may not be a traditional one.
Non-QM loans are also more flexible in terms of credit. A Non-QM lender may qualify a borrower after a significant credit event. Examples include a foreclosure or bankruptcy.
FAQs
What is the difference between Qualified and Non-Qualified mortgages?
A Non-QM loan uses alternative methods of income verification (instead of the standard income methods of verification of a QM loan) to help the borrower get approved for a mortgage loan. Non-QM loans are not guaranteed, or backed by FHA, VA, Fannie Mae, or Freddie Mac. A loan that meets QM requirements provides safe harbor for lenders against lawsuits from borrowers who default on their loan.
Who may benefit from a Non-QM loan?
Self-employed borrowers are often paid sporadically and have more than one stream of income. This can make it difficult to obtain a Qualified Mortgage. These individuals often try to use loans that are based on their bank statements instead of their tax returns.
Prime borrowers are often keen to take advantage of Non-QM loans. This is because they usually have great credit and are looking to take on a loan that may have interest-only payments. Prime borrowers may also have a higher-than-normal debt-to-income ratio. This can make them great candidates for Non-QM loans.
Near or non-prime borrowers who don’t have enough credit, a prior bankruptcy, or distressed property sale within the last two years are often good candidates for Non-QM loans.
Borrowers with sizable assets and prime credit may decide on a Non-QM loan to maintain a positive cash flow rather than just buying the home in cash.