Many people find it challenging to achieve the American Dream of purchasing a home. This is not because they can't afford one but because their financial past or income verification documentation doesn't align with conventional loan requirements. Maybe they've overcome bankruptcy or are self-employed. Non-qualified mortgage loans, or non-QM loans, do not meet a qualified mortgage's standards, and lenders can use non-traditional income verification methods to approve the borrower.
What's the difference between a qualified mortgage loan and a non-QM loan?
A qualified mortgage (QM) loan is a mortgage class that meets specific lender and borrower standards, as outlined in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The act requires borrowers to show they can repay the loan on both QM and non-QM loans. QM loans cannot have risky features like negative amortization, balloon payments, or interest-only payments.
A non-QM loan is essentially any loan that doesn't meet the criteria of a QM loan. Lenders use alternative methods of income verification to assist the borrower in getting approved. Since the loans are not insured, guaranteed, or backed by any government agency, the lender usually keeps them in their portfolio.
Who can benefit from a non-QM loan?
Self-employed borrowers who can't provide a W-2 or pay stubs to verify their income are ideal candidates for a non-QM loan. Lenders can look at their bank statements over the past two years to clearly understand their income. Other non-QM candidates can include those with a high net worth without traditionally documented income.
Pros and cons of non-QM loans
With non-QM loans, the lender is assuming most of the risk. Therefore, lenders can impose their requirements and terms. Generally, lenders tend to be more flexible in their conditions. This could make it easier for a borrower to qualify for a non-QM loan when other mortgage loans aren't an option. Non-QM loans also allow the purchaser to borrow above the conforming limit Fannie Mae and Freddie Mac set. These loans are also called Jumbo Loans.
Non-QM loans are typically kept in a lender's portfolio, whereas QM loans are eligible for sale to secondary market investors. With a non-QM loan, you may be more likely to maintain the relationship of having your original lender as your servicer instead of having your loan sold and serviced by other lenders.
There are some cons to non-QM loans that you should consider. As non-QM loans are not insured, guaranteed, or backed by a government agency, the interest rate or fees may be higher than a QM loan option.
Considering these pros and cons and your situation when pursuing a non-QM loan will help you determine whether it's the right choice for you. Research is critical when selecting a mortgage loan.
If you would like to learn more about non-QM loans and whether one is right for you, contact the experts at NASB at 855-921-4921 or click here for more information.
