If you do not meet the requirements for a standard mortgage, you might want to explore a non-QM loan as an alternative option. Non-QM loans have more lenient requirements but could come with higher interest rates and favorable terms compared to conventional mortgages. Let’s explore non-QM loans and how they function.
What Are Non-QM Loans?
Non-qualified mortgages, also referred to as “Non-QM loans,” are mortgage loans that lack backing from a federal government department or government-sponsored entities like Fannie Mae and Freddie Mac. Typically, a borrower opts for a non-QM loan when they fail to meet the credit and income requirements of a traditional loan. After the 2008 Housing Crisis, the Dodd-Frank Bill established a qualified mortgage (QM) that outlined the criteria for GSE insurance.
Loans that do not meet the criteria to be classified as QM loans are typically due to factors such as unverifiable income, low credit score, or high debt. However, a non-QMI loan might include terms that the GSEs consider too risky, like negative amortization or balloon payments.
Non-QM Loans Examples
1. Bank Statement Loans
Bank statement loans simply need a bank statement for approval. QM loans necessitate a thorough collection of financial documents like W-2s, pay stubs, tax returns, and more.
Bank statement loans are ideal for business owners and self-employed professionals who have sufficient income to qualify but lack the necessary documentation.
2. Asset-Based Loans
By using asset-based loans, you can utilize your assets like real estate and investment accounts to qualify for a home loan. Here are some examples of assets:
- Accounts for checking or savings
- Accounts for investing
- Do you have any other liquid asset registered under your name?
Asset-based loans are tailored for individuals with significant cash reserves who may not meet traditional loan requirements.
3. Interest-Only Loans
An interest-only loan requires the borrower to make payments solely on the interest for a specific period or the entire loan term. Throughout the interest-only period, the principal amount will not change. When the interest-only period ends, the borrower has the option to either pay off the full principal amount or switch to an amortized loan.
4. Jumbo Loans
A jumbo loan refers to borrowing an amount that surpasses the loan servicing limits established by Fannie Mae and Freddie Mac. For most areas, the loan amount for a single-family home exceeds $647,200 (except in high-cost markets where the limit is increased to $970,800).
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5. No Income Investment Loans
An investment loan with no income is designed for buying an investment property. Instead of verifying the borrower’s income, the lender will analyze the rental income to assess the property’s potential cash flow. Thus, the borrower only needs to provide the property’s information, without any income statements or financial documentation.
How to Get a Non-Qualified Mortgage?
1. Find out if you qualify for a non-QM loan
One of the initial steps in obtaining a non-QM loan is assessing your eligibility. Non-QM mortgages are ideal for borrowers facing special situations that make them ineligible for a QM mortgage, like individuals with unconventional income streams or a high debt-to-income ratio.
2. Explore various non-QM lenders and compare their rates
Non-QM mortgages are not as common as QM mortgages, so you might have to look at different lenders to find ones that provide non-QM loan products.
3. Collect all required documents
Non-QM lenders usually ask for different paperwork compared to QM lenders. You must provide the necessary information regarding your financial situation, along with supporting documents such as bank statements and tax returns.
4. Apply for the non-QM mortgage loan
After locating a lender and collecting all required documents, you can proceed with applying for the non-QM mortgage. The lender will assess your application and determine their decision using your financial situation and credit history. If you fulfill their requirements and submit the required documentation, your non-QM mortgage loan will be approved.
Non-QM Loan Interest Rates
Non-QM loans come with higher interest rates due to the increased risk involved in issuing them. QM loans may be insured by the GSEs or the Federal Government, providing protection for lenders in case of borrower default.
However, in the case of a non-QM loan, the bank is responsible for any losses if the borrower defaults since it cannot be insured. Therefore, non-QM loans typically have interest rates that are approximately 1.25% higher than QM loans of the same amount. By doing this, the lender can reduce their risk if the borrower fails to make payments.
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