Qualified vs. Non-Qualified Mortgage Loans

Looking for a loan but not sure where to start? 

Have a non-traditional source of income and are unsure whether you qualify for a normal loan

Perhaps you’ve had problems securing a mortgage in the past and are looking into other options.

Understanding mortgage loans can be tricky. But, it’s important to know the basics when you’re thinking about buying a home. 

In this blog we will understand about two most common types of loans(QM and Non-QM) and what is the difference between QM and Non-QM loans

What Is The Difference Between QM and Non-QM Loans?

There are two main types of mortgage loans: Qualified Mortgage (QM) loans and Non-Qualified Mortgage (Non-QM) loans.

QM Loans are different from Non-QM loans. Let us understand them one by one.

What’s a Qualified Mortgage Loan?

QM loans provide lenders with specific legal safeguards after they can demonstrate that you have the ability to repay your loan. 

The tougher rules for QM loans were implemented to safeguard homeowners and lower the chance of defaulting on house loans. 

These guidelines prohibit dangerous mortgage loan features including balloon payments and interest-only payments. 

In addition to limiting upfront points and fees, the criteria determined how much of a borrower’s income might be applied to mortgage loan debt. 

In general, the borrower’s debt-to-income ratio for a QM loan cannot exceed 43%. Also, no loan duration can exceed 30 years, and no negative amortization can occur. 

Negative amortization causes your loan principal to rise over time even when you make payments.

What’s a Non-Qualified Mortgage Loan?

Any loan that does not meet all of the requirements for a QM loan is considered a Non-QM loan. 

These non-traditional loans are appropriate for borrowers with variable or fixed incomes, as well as those who work for themselves as independent business owners, entrepreneurs, contractors, hospitality workers, retirees, actors, artists, musicians, and so on. 

Non-QM loan applicants may have the income, but they do not necessarily qualify for a typical mortgage based only on their tax returns, W-2s, or pay stubs. 

Non-QM lending criteria often require the lender to assess the borrower’s Ability to Repay (ATR) using a variety of terms, such as analyzing cash flow from personal and company bank accounts. 

Non-QM loans are often reserved for borrowers with unique income qualifying circumstances, as well as potential credit difficulties such as bankruptcy, foreclosure, late payments, or other isolated credit issues. 

QM Vs Non-QM Loan – How Do They Differ?

A Non-QM loan differs from a QM loan in that it uses alternate techniques of income verification (as opposed to the typical income verification procedures of a QM loan) to assist the borrower in obtaining a mortgage loan. 

Non-QM loans are not insured, guaranteed, or backed by the FHA, VA, Fannie Mae, or Freddie Mac. 

Also, a loan that fulfills QM criteria provides a safe harbor for lenders against claims from borrowers who default on their loans.n.

QM Vs Non-QM: What Loan Is Right for You?

It all boils down to whatever loan best fits your position and demands. If you are unsure of your position and the type of loan which will best suit your situation, get in touch with United 1 mortgage. 

Our loan officer may discuss a variety of mortgage loan choices with you to help you decide which loan is best for you. Contact us today to learn more!