What are Non-QM Loans?

Many homeowners lack the standard or continuous sources of income required by mortgage lenders. However, even if they are unable to qualify for conventional loans for a variety of reasons, these buyers may have sufficient income or assets to afford homeownership. In certain cases, a non-qualified mortgage (non-QM) could be the solution.

 

Following the 2008 mortgage catastrophe, federal regulators tightened borrower standards for mortgage loans that might be backed and purchased by government entities. Loans that meet all of the new standards are known as “qualified mortgages.” Any loan that does not meet such requirements is known as a “non-qualified mortgage,” or non-QM.

 

A non-QM mortgage loan qualifies borrowers by using alternative means of income verification. Even if these loans may not match the normal criteria, they are not always riskier loans. All borrowers must still verify their ability to repay the loan. Because non-QM loans require more labor to process, interest rates typically range between 0.5% and 5% higher, depending on the loan terms.

Non-QM Loan Benefits

What are the Non-QM Loan Requirements?

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.

Types of Non-QM Loans

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.

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FAQ

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.

Non-QM loans cater to the demands of self-employed borrowers and those in unconventional financial situations by allowing alternate income verification techniques. They frequently provide both fixed and adjustable loan alternatives. In addition, second houses and investment properties may qualify.

 

A Non-QM loan allows the borrower to maintain liquidity rather than investing all of their cash 

assets in real estate, allowing them to diversify their portfolio. Furthermore, mortgage interest payments made with a Non-QM loan are tax deductible each year. If you need financial or tax guidance, see a tax adviser. 

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