What is a non-qm?
To understand non-qualifying mortgages, it helps to understand traditional loans. Traditional loans have borrower requirements for documentation, debt-to-income ratios (DTI), credit scores, and assets. They also have limits on fees and buying down interest rates by paying for points. Loan terms must be 30 years or less. These requirements protect the lender and the borrower. Lenders are required to make a “good faith” determination about your ability to repay a loan. This keeps them from loaning money to people who can’t afford the mortgage and default on the loan. In some ways it protects both the lender and the borrow.
Non-qm loans don’t have to follow these guidelines. A non-qm is a non-conforming home loan that is not backed by the government nor required to meet the Consumer Financial Protection Bureau agency-standard documentation requirements. This means they can be more flexible when it comes to their requirements. This also means there’s greater risk for the lender and in some cases the borrower. If you default on a non-qm you can’t claim that your lender knew you couldn’t pay the mortgage and financially took advantage of you.
Who might need a non-qm?
Traditional mortgages require two years of W-2 forms, pay stubs for the last thirty days, or in the case of the self-employed: Year-to-date profit and loss statement (two years’ worth) and Form 1099s used for income reporting and taxes. The borrower must be self-employed for two full years before qualifying for a loan. Non-qms don’t have these requirements. If you’re self-employed and your income fluctuates, you may not be able to show a consistent and verifiable income that most lenders what to see. A non-qm would allow you to obtain a loan.
In addition, if you’re interested in real estate investment, a non-qm might work for you as well. The term of the loan can be shorter, and there are fewer restrictions than traditional loans. You can also build a larger portfolio without the limits of traditional loans. Finally, this is loan option for foreign nationals who are eligible for non-qm loans.
What can you expect with a non-qm?
Not all lenders offer non-qm. Most lenders want to decrease risk; they want to know you can pay. Income documentation, credit score minimums and DTI maximums serve that purpose. A non-qm lender is willing to take that risk, but it may come with a price.
- Count on higher interest rates.
- Expect increased upfront fees
- 10%-25% minimum down payment
Just because non-qms don’t have the traditional DTI requirements, it doesn’t mean your credit score and DTI don’t come into play. The lender will look at everything including any recent credit events (i.e., foreclosure, bankruptcy, recent collections, or charge-offs). These things won’t necessarily rule you out, but they may impact your interest rates, and you may need to bring a higher cash down payment to the table.
Summary:
If you’ve been denied a loan, have sporadic income, or need a financing option that allows you to grow your real estate portfolio, then a non-qm might be right for you. The advantages include alternative documentation, more relaxed requirements, and eligibility for foreign nationals and borrowers with recent credit events.
