What Are Non-QM Loans?
Examples of Non-QM Loans
How to Get a Non-Qualified Mortgage
Non-QM Loan Interest Rates
Differences Between QM and Non-QM Loans
Non-QM Loans Pros and Cons
Is a Non-QM Loan a Good Idea?
Non-QM Loans Bottom Line
Non-qualified mortgages (also known as "Non-QM loans") are mortgage loans that are not backed by a department of the federal government or by the government-sponsored entities Fannie Mae and Freddie Mac. Usually, a borrower will get a non-QM loan because they do not meet a traditional loan’s credit and income requirements. Following the 2008 Housing Crisis, the Dodd-Frank Bill created what is known as a qualified mortgage (QM) which set the parameters for what the GSEs could and could not insure.
Non-QM loans don’t meet the standards to be classified as QM loans, usually because the borrower can’t verify their income, they have a low credit score, or they have high debt. But a non-QMI loan may also have terms deemed too risky for the GSEs, such as negative amortization or balloon payments.
Non-QM loans can be an alternative for those who would otherwise not qualify for a loan. But they can also be risky because they don’t have to adhere to the usual standards recommended by the federal government to protect lenders.
- Bank Statement Loans
- Asset-Based Loans
- Interest-Only loans
- Jumbo Loans
- No Income Investment Loans
- Foreign National Loans
1. Bank Statement Loans
Bank statement loans only require a bank statement for approval. QM loans require extensive financial documentation such as W-2s, pay stubs, tax returns, etc.
Bank statement loans are great for business owners and self-employed professionals who may have enough income to qualify but don’t have the documentation to prove it.
2. Asset-Based Loans
Asset-based loans allow you to leverage your assets, such as real estate and investment accounts, to be approved for a home loan. Assets could include:
- Your checking or savings accounts
- Investment accounts
- Any other liquid asset in your name
Asset-based loans are designed for those who have substantial cash but can’t otherwise qualify for a loan.
3. Interest-Only Loans
An interest-only loan means the borrower pays only interest for a set period or the duration of the loan. During the interest-only period, the principal will remain unaffected. At the end of the interest-only period, the borrower can either pay the entire principal in full or refinance to an amortized loan.
4. Jumbo Loans
A jumbo loan means that the amount being borrowed exceeds the loan servicing limits set by Fannie Mae and Freddie Mac. In most places, that’s a loan greater than $647,200 for a single-family home (although the limit is raised in specially designated high-cost markets where the limit is raised to $970,800).
5. No Income Investment Loans
A no-income investment loan is specifically used to purchase an investment property. Rather than verifying the borrower’s income, the lender will use a rental income analysis to determine the property’s potential cash flow. Therefore, no income statements or financial documentation are required from the borrower besides the property’s information.
6. Foreign National Loans
Foreign national loans are mortgages for foreign nationals looking to buy property in the United States who don’t have US credit or a social security number. Applicants can submit a credit report from their own country or use existing income and assets to verify their creditworthiness.
- Determine if you are a good candidate for a non-QM loan
- Shop around and compare rates from different non-QM lenders
- Gather all the necessary documentation
- Apply for the non-QM mortgage loan
1. Determine if you are a good candidate for a non-QM loan
The first step in getting a non-QM loan is to determine if you're a good candidate. Non-QM mortgages are best for borrowers with unique circumstances that prevent them from qualifying for a QM mortgage, such as buyers with non-traditional income sources or with a high debt-to-income ratio.
2. Shop around and compare rates from different non-QM lenders
Non-QM mortgages are less widely available than QM mortgages, so you may need to shop around a bit to find lenders that offer non-QM loan products.
3. Gather all the necessary documentation
Non-QM lenders typically require different documentation than QM lenders. You'll need to be able to provide the required information about your financial situation, including supporting documents like bank statements and tax returns.
4. Apply for the non-QM mortgage loan
Once you have found a lender and gathered all the necessary documentation, you can apply for the non-QM mortgage. The lender will review your application and make a decision based on your financial situation and credit history. As long as you meet their requirements and provide the necessary documentation, your non-QM mortgage loan will be approved.
Non-QM loans are riskier to issue and therefore feature higher interest rates. QM loans can be insured by the GSEs or the Federal Government itself, which means that if the borrower defaults, the lender will have protection.
But with a non-QM loan, the bank must accept the loss if the borrower defaults because it can’t be insured. As a result, interest rates on non-QM loans tend to be about 1.25% higher than on QM loans for the same amount. Doing so allows the lender to hedge some of their risk in the event the borrower stops making payments.
The main difference between QM and Non-QM loans is the flexibility of the underwriting process and the corresponding interest rates. QM loans have a stricter approval process and require far more financial documentation than QM loans.
Lenders will want to see your W2s, pay stubs, bank account statements, recent tax returns, proof of assets, employment information, and possibly even character references before you can be approved for a QM loan. They will also pull your credit report and require a score of at least 620 for a conventional mortgage (580 for an FHA or VA loan).
QM loans typically feature a much less intrusive approval process, although the requirements vary depending on the lender and the financial product. For instance, a bank statement loan only requires a few months of prior bank statements, and a no-income investment loan will only need an analysis of the property.
But as a result, QM loans typically carry much higher interest rates to balance the additional risk. So, while the lax approval process may be worth it for specific borrowers, most are better off with a regular QM loan.
Non-QM Loans Pros
- Easier to Qualify
- Fast Application Process
- You Don't Have to Be a US Citizen
1. Easier to Qualify
The primary benefit of Non-QM loans is that they are easier to qualify for those with low credit or income that is tough to verify. This makes non-QM loans attractive to borrowers who may not qualify for a conventional mortgage or a loan guaranteed by the federal government.
2. Fast Application Process
The application process for a non-QM loan is similar to applying for any other loan. You may even be approved faster because the underwriter has less paperwork they have to analyze. So, you get access to the funds as quickly as you need them.
3. You Don’t Have to Be a US Citizen
Some Non-QM loans, such as foreign national loans, don’t require you to have a visa, green card, or social security number to be approved. So, if you’re a foreign investor looking to purchase property in the US, non-QMI loans can be crucial.
Non-QM Loans Cons
- Higher Interest Rates
- Can Have Riskier Features
- Harder to Find
1. Higher Interest Rates
The biggest drawback of non-QM loans is that they feature higher interest rates. You’ll have to pay for flexibility and a laxer application process one way or another, so be prepared to get a higher rate if you go with a non-QM loan.
2. Can Have Riskier Features
Non-QM loans often have features deemed too risky for a normal loan. An example is a negative amortization, where the principal increases even when you’re making on-time payments. So, read all the fine print before obtaining any type of non-standard loan.
3. Harder to Find
QM loans are offered by almost any bank or credit union in America, whereas non-QM loans are a bit more niche. Therefore, you must look into any lender you come across who offers non-QM loans. Do your research to ensure that they’re reputable and provide a safe financial product.
Non-QM loans can be a good idea but only for specific borrowers in a particular situation. Most borrowers should go with a standard QM loan because it will be cheaper and less risky; even if you have a low credit score, it’s often better to apply for an FHA loan or work on your credit until you qualify for a conventional mortgage.
But in certain situations, non-QM loans do have their benefits. For instance, business owners who write expenses off on their taxes may have difficulty showing enough income to satisfy a conventional lender, even though they have the money to make the payments. In that case, a bank statement loan may make sense. Or, if you’re an investor who doesn’t mind paying a higher rate for a faster approval process, then a non-income loan may be just the thing.
The bottom line is that non-QM loans are usually reserved for specific situations or as a last resort. If you qualify for a traditional QM loan, you’re better off sticking with a conventional mortgage because of the security and predictability. But in specific scenarios, a non-QM loan can be beneficial as long as you do your research and understand the risks.