What Is a Non-QM Mortgage and How Do They Work?
A non-QM or non-qualified mortgage is a mortgage loan that doesn’t meet the lending requirements set by Dodd-Frank Act. These regulations were passed in 2010 to ensure that borrowers can repay their loans and prevent a repeat of the subprime mortgage crisis seen in the 2008 housing market crash.
Not everyone satisfies the federal requirements for a conventional mortgage, and for this reason, a non-qualified mortgage may be helpful. So whether you’re a self-employed borrower, freelancer, or a small business owner looking to purchase your dream home but don’t qualify for a traditional mortgage, a non-QM might be a great option to realize your dream of homeownership.
When you apply for a non-QM loan, lenders typically don’t look at your income, debt-to-income ratio, and other requirements that qualified mortgages check, making them a good option for borrowers with fluctuating income. One major downside, though, is that you won’t enjoy the same regulatory protection that comes with qualified mortgages.
What is the Difference Between a Qualified vs. Non-Qualified Mortgage?
Qualified mortgages are loans that meet the requirements set by the Consumer Financial Protection Bureau (CFPB). These loans are backed or insured by government-sponsored agencies like Fannie Mae or Freddie Mac and the Federal Housing Administration.
On the other hand, a non-QM mortgage is a more flexible form of financing that allows homebuyers to secure a mortgage if they don’t meet the requirements for a qualified mortgage. Unlike QM mortgages, non-QM loans aren’t backed by any government program.
Here’s a quick overview of the difference between qualified and non-qualified mortgages.
|Mortgage loans backed by government programs like VA, FHA loans, Fannie Mae, or Freddie Mac
|Aren’t guaranteed by any government program
|Lenders must follow ATR/QM rules
|Lenders do not need to follow ATR/QM rules
|Borrowers must document income
|No income verification requirements
|Borrowers must meet a credit score and DTI threshold to qualify
|Non-QM lenders have lenient requirements
|Interest rates for qualified mortgage loans conform with the industry standards
|Interest rates are typically higher than traditional mortgages.
Most Common Requirements for Non-QM Mortgage
The requirements for a non-QM mortgage vary depending on the lender. Generally, most mortgage lenders require the following:
- A decent credit score
- At least 50% DTI ratio (varies by lender)
- Two years of proof of self-employment
- 12 to 24 months of personal or business bank statements (for some)
- Business license and any other documentation related to your business
Who Are Non-QM Mortgages Best For?
Non-qualified mortgages are best for borrowers who do not meet the requirements for conventional mortgages. The following people may benefit from non-QM mortgages:
- Self-Employed Individuals: Anyone who is not an employee of a company is considered “self-employed.” Such people find it hard to document their income since it fluctuates, making non-QM loans their best option.
- Business Owners: Whether you’re running a startup or an established business, you’ll always find it hard to get a qualified mortgage since you require more paperwork to verify your income. A non-QM loan is thus best for business owners looking to get approved for a mortgage.
- Unconventional/Contract Workers:If you’re a contract worker or 1099 employee, a non-qualified mortgage loan can help you get a loan to purchase or refinance your home.
- Foreign Nationals:Government-backed loans usually require a Social Security number or a W-2. Since non-QM mortgages don’t have such requirements, foreign nationals can pursue their dream of homeownership in the United States.
- People With Poor Credit: Lenders will often look at your credit score when deciding whether to give you financing and the interest they should charge on the loan. If your credit score is below the lender’s threshold, a non-QM loan might be a perfect fit.
- People With High Debt: Lenders typically don’t give loans to borrowers with more than 50% DTI since they are seen as individuals who can’t manage their monthly payments. Getting out of that much debt can take years and further push your dream of homeownership. A non-qualified mortgage can help you purchase or refinance your home while managing debt.