Achieving the American Dream of purchasing a home is elusive to many people. Not because they can't afford to buy one, but rather 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, are loans that do not meet a qualified mortgage's standards, and lenders can use non-traditional methods of income verification 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 pay back the loan on both QM and non-QM loans. QM loans cannot have certain more 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 get approved. Since the loans are not insured, guaranteed, or backed by any government agency, the lender usually keeps the loan 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 get a clear picture of their income. Other non-QM candidates can include those that have 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 own 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 set by Fannie Mae and Freddie Mac. 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 your loan being sold and serviced by other lenders.
With that, 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.
Keeping these pros and cons in mind and your situation in pursuing a non-QM loan will help you determine whether it's the right choice for you. Doing research is critical when selecting the type of mortgage loan.
If you would like to learn more about Non-QM loans and if one is right for you, contact the experts at NASB at 855-921-4921, or click here for more information.