What are non-QM loans & how do they work?
A non-QM loan, or non-qualified mortgage loan, is meant for homebuyers who may not qualify for a qualified loan. These buyers may be missing documents. They may be self-employed. Or they may have potential issues with their credit, but still want to achieve the goal of homeownership.
Continue reading to learn more about non-QM loans and the key differences and benefits. You can also start your application and begin your journey to a new home.
What is a non-QM loan?
A non-QM loan is a type of mortgage loan that does not meet the criteria for a qualified mortgage (QM) as set forth by the Consumer Financial Protection Bureau (CFPB). This is protected under the Dodd-Frank Wall Street Reform and Consumer Protection Act.
Non-QM loans are not subject to the same standards and regulations as qualified loans. Qualified loans are intended to ensure that borrowers have the ability to repay their loans. Non-QM loans may have different underwriting criteria.
These types of loans may allow for higher debt-to-income ratios or considering alternative documentation of income. They may also have higher interest rates or fees to offset the increased risk for the lender.
Non-QM loans may be offered to borrowers who do not meet the strict requirements of a qualified loan. For example, homebuyers with self-employment income, high net worth, or a history of credit issues may not qualify for certain loan types. However, it's important to note that non-QM loans are generally considered riskier than QM loans, and borrowers should carefully consider the terms and potential risks before choosing this type of loan.
How do non-qualified mortgages work?
Non-qualified mortgages (non-QM) work differently from qualified mortgages (QM). QM loans are subject to strict underwriting criteria set by the Consumer Financial Protection Bureau (CFPB). These restrictions ensure that borrowers can repay their loans. In contrast, non-QM loans have more flexible underwriting criteria and are typically offered to borrowers who do not meet the strict standards of a QM loan.
Non-QM loans may have higher interest rates and fees because they are considered riskier than QM loans. However, they may also offer benefits such as lower down payment requirements or more lenient credit score requirements. Non-QM loans may also consider alternative sources of income, such as self-employment income, rental income, or investment income, that may not be counted towards a borrower's income for a QM loan.
Non-QM loans are not subject to the same regulations as other loan types, lenders may have more flexibility in offering these loans. However, it's important for borrowers to carefully consider the terms and potential risks of a non-QM loan before choosing this type of loan. Non-QM loans may have higher interest rates, fees, and other costs, and borrowers should ensure that they have a clear understanding of the terms and repayment obligations before agreeing to the loan.
What’s the difference between a non-QM loan & a DSCR loan?
Non-QM loans and DSCR (Debt Service Coverage Ratio) loans are both types of mortgage loans, but they are designed for different types of borrowers and have different underwriting standards.
Non-QM loans are for borrowers who do not meet the underwriting standards for traditional qualified mortgages. These borrowers may have non-traditional income sources or have a high level of debt compared to their income, making it difficult to qualify for a QM loan. Non-QM loans are typically offered by alternative lenders and may have higher interest rates and fees than QM loans.
On the other hand, DSCR loans are designed for commercial real estate investors who want to finance income-producing properties. DSCR stands for debt service coverage ratio, which is a measure of the property's ability to generate enough income to cover its debt service payments. DSCR loans require borrowers to meet a minimum DSCR threshold, typically around 1.25, which means that the property's net operating income must be at least 125% of its debt service payments. DSCR loans are considered to be a more conservative form of lending because they focus on the property's income-generating ability rather than the borrower's creditworthiness.
In summary, non-QM loans are designed for individual borrowers who do not meet the underwriting standards for traditional mortgages, while DSCR loans are designed for commercial real estate investors who want to finance income-producing properties based on the property's income-generating ability.
Who qualifies for a non-QM loan?
Non-QM loans are generally designed for borrowers who do not meet the strict requirements of a qualified mortgage (QM). These loans are often used by self-employed individuals, those with fluctuating incomes, or borrowers with credit issues. However, the specific requirements for a non-QM loan may vary depending on the lender and the type of loan being offered.
Here are some general criteria that may be considered for a non-QM loan:
General criteria used to Qualify for a non-Qm loan
- Credit Score
While non-QM loans may be offered to borrowers with lower credit scores, some lenders may have minimum credit score requirements. - Debt-to-income ratio
Non-QM loans may allow for higher DTI ratios than QM loans. However, lenders will still want to ensure that the borrower has the ability to repay the loan. - Income verification
Non-QM loans may allow for alternative methods of income verification, such as bank statements, tax returns, or asset-based income. - Employment history
Lenders may consider a borrower's employment history and stability in determining their ability to repay the loan. - Property type
Non-QM loans may be available for unique or non-traditional properties. Investment properties, mixed-use properties, or properties in need of repair may be considered for a non-qualified mortgage.Non-QM loans may have higher interest rates and fees than other mortgage types. This is due to the higher risk associated with non-QM loans. Borrowers should carefully consider the terms and potential risks of a non-QM loan before choosing this type of loan.
What's the difference between qualified and non-qualified mortgages?
The main difference between qualified and non-QM loans is that QM loans must meet strict criteria set by the Consumer Financial Protection Bureau (CFPB). Non-QM loans are not subject to those same regulations.
QM loans are designed to ensure that borrowers have the ability to repay their loans. As a result, borrowers must meet specific criteria. Key requirements include:
1. Limits on certain loan features, such as balloon payments or negative amortization
2. Maximum debt-to-income ratios
3. Limits on points and fees charged by the lender
4. Required documentation of income, assets, and employment
5. Limits on loan terms and interest rates
Non-QM loans are generally designed for borrowers who do not meet the strict requirements of a QM loan. These loans may have more flexible underwriting criteria. Higher DTI ratios or alternative methods of income verification may allowed.
Non-QM loans may also offer benefits such as lower down payment requirements. They may also come with more lenient credit score requirements. However, because they are not subject to the same regulations as QM loans, non-QM loans may have higher interest rates and fees. They may be considered riskier for both lenders and borrowers.
Where can I apply for a non-QM loan?
We can help you start on the path to a non-QM loan today. Begin by applying online, and our team will help you through the mortgage process. If you may not be able to get a qualified loan, that doesn't mean that homeownership is out of reach. Apply today and let us provide the support you need.
