If your income or credit history fall outside the stringent guidelines of the Consumer Financial Protection Bureau (CFPB), a non-QM loan may be worth considering. 

These loans are offered to borrowers who may not qualify for traditional mortgage loans due to factors such as self-employment, high debt-to-income ratios or credit hurdles.  

Additionally, this type of loan can be more flexible and tailored to meet the specific needs of individual borrowers.

Check out our complete guide to Non-QM loans to understand the risks, types of Non-QM Loans available and the benefits and drawbacks for borrowers considering this type of financing.

What are Non-QM loans?

“Non-QM loans,” short for non-qualified mortgage loans, are loans that do not meet the guidelines set by the Consumer Financial Protection Bureau (CFPB) for qualified mortgage loans (QM loans). 

These loans typically have more flexible underwriting requirements.

Unlike QM loans—that is, mortgages that meet certain criteria set by the CFPB to ensure the borrower’s ability to repay the loan—Non-QM loans are for borrowers who do not meet these criteria. 

This typically includes self-employed borrowers, those with high debt-to-income ratios, those with limited credit history or borrowers who need a loan that exceeds the CFPB limits. 

Many non-QM lenders provide loans to applicants who have recently experienced foreclosure or bankruptcy. This is uncommon with QM loans because you typically need to wait seven years following a foreclosure to be approved for a traditional loan.

Non-QM loans for self-employed borrowers

Non-QM loans have their perks, especially with the recent uptick in the gig economy (which, in short, refers to a labor market based on part-time or short-term employment).

Many entrepreneurs are raking in thousands of dollars monthly through Venmo, PayPal, Payoneer and other web-based services without the traditional pay stub. 

Non-QM loans will also be a good option for independent contractors, real estate investors or retirees. 

Understanding non-QM loans is essential because they offer more options for borrowers who do not meet the strict requirements of QM loans. However, because non-QM loans are considered riskier, they often come with higher interest rates.

Types of Non-QM loans

There are several types of Non-QM loans, including the following. 

• Bank Statement loans: These non-QM loans that allow borrowers to use their bank statements to prove their income rather than traditional documentation such as W-2s or tax returns.
• Debt service coverage ratio (DSCR) loans: The primary users of DSCRs are real estate investors who need to finance income-producing properties such as rental properties, commercial buildings or multi-unit properties.
• Interest-only loans: A type of non-QM loan that allows borrowers to make interest-only payments for a set period of time, typically between five and ten years. During this period, the borrower does not pay any principal and only pays the interest on the loan. After the interest-only period ends, the borrower must begin making principal and interest payments for the remaining term of the loan. This can result in higher monthly payments than the interest-only period, so it’s important to carefully consider the loan terms and fees before applying.
• Asset Depletion loans: These are non-QMs that allow borrowers to use their assets as a source of income to qualify for a mortgage. These loans are designed for borrowers who have significant assets but may not have the sufficient documented income to qualify for a traditional mortgage.
• Foreign National loans: Designed for non-U.S. citizens, these loans are for citizens of other countries who want to purchase property in the United States.

Criteria to qualify for a Non-QM loan

To qualify for a non-QM loan, borrowers typically need to meet certain criteria which may vary depending on the lender and the type of loan. The following are some common criteria that lenders may look for:

1. Credit history: While non-QM loans may be available to borrowers with less-than-perfect credit, lenders may still require a minimum credit score and a strong credit history.
2. Income and employment: Lenders may require proof of income, such as tax returns or bank statements, and may prefer borrowers who have been employed in the same industry for a certain period of time.
3. Debt-to-income ratio (DTI): Lenders may require a lower DTI for non-QM loans than they would for conventional loans, meaning that borrowers’ monthly debt payments cannot exceed a certain percentage of their income.
4. Down payment: Non-QM loans may require a larger down payment than traditional loans, with some lenders requiring 20% or more.
5. Collateral: Some non-QM loans, such as asset-based loans, may require the borrower to provide collateral in the form of real estate, investments or other assets.

Advantages of Non-QM loans

• Flexibility in eligibility criteria: Non-QM Loans often have more flexible eligibility criteria, making it easier for borrowers with unique financial circumstances to obtain financing.
• Borrower options: Non-QM Loans offer borrowers more options in terms of loan terms, interest rates and repayment schedules.
• Higher loan amounts: Non-QM Loans may allow for higher loan amounts than traditional QM Loans.

Disadvantages of Non-QM loans

• Higher interest rates: Non-QM Loans may come with higher interest rates compared to QM Loans, possibly resulting in higher monthly payments.
• Higher fees: Non-QM Loans may have higher fees associated with the application process and loan servicing.
• Potentially more risk: Non-QM Loans may come with more risk for both borrowers and lenders due to the lack of standardization in underwriting criteria and repayment terms.

How to determine if Non-QM Loan is right for you

First, evaluate your financial situation and credit history to determine if you are eligible for a QM loan.

Consider your unique financial circumstances and whether a non-QM loan may offer more flexibility and better loan terms. 

Research and compare different non-QM Loan options from various lenders to find the best fit for your needs.

Compass Mortgage can help with your Non QM loan needs 

Non-QM loans are a viable option for borrowers who may not qualify for traditional QM loans for various reasons such as complex income structures or unique property types. 

Non-QM loans offer more flexibility and have looser underwriting standards, but they come with higher interest rates and stricter lending criteria. 

It’s important for borrowers to carefully evaluate their financial situation and weigh the pros and cons of non-QM loans before deciding to apply for this kind of financing. 

Working with a reputable lender, such as Compass Mortgage, helps borrowers navigate the process and find the best loan product for their unique needs. 

Get Committed

If you’re preparing to buy a home, you need a lender that will help you navigate any market—and help you secure the lowest possible interest rate.

Learn how Compass Mortgage’s Get Committed program will not only help you contend with the uncertainties of buying a home but also put you ahead of other offers before you even start your search.

Contact Compass Mortgage today for a better mortgage experience.

Photo by Mikhail Nilov