Mortgage loans generally fit into a few different categories, including qualified mortgages and non-qualified mortgages.
Qualified mortgages (QM) follow the “ability-to-repay” rule, which means borrowers must meet certain requirements to qualify.
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A non-QM loan, on the other hand, doesn’t need to meet these same requirements. Lenders can offer more flexible options and less strict qualifications.
Read on to learn more about the non-QM loan and how to qualify for one with a lender.
What is a non-qualifying mortgage loan?
A non-QM loan is a helpful borrowing alternative for those who have the funds to afford their monthly mortgage payments, yet aren’t able to easily prove this to a lender.
For example, traditional mortgage loans require certain income documentation such as pay stubs and tax returns.
If you’re a small business owner, a real estate investor, a contractor, seasonal worker or a self-employed borrower, it can be difficult to prove your income using this method. Your income may not be consistent or may follow certain seasonal patterns.
Additionally, your tax returns may not accurately reflect your true income because you write off a lot of business expenses.
Instead of following loan requirements for income verification and debt for a qualified mortgage, a non-QM loan might use bank statements, 1099 forms, asset statements or a combination of these statements to determine income.
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What is the difference between a QM and a non-QM loan?
According to the Consumer Financial Protection Bureau (CFPB), QM loans must have certain features that are considered less risky and follow the “ability-to-repay” rule.
The requirements include:
- Verification of monthly income, debt and assets
- Limits on upfront points and fees
- Annual percentage rate (APR) cannot exceed a certain threshold
- No interest-only periods, negative amortization, balloon payments or loan terms longer than 30 years
QM loans may be backed by the FHA, VA, USDA or Fannie Mae and Freddie Mac.
They provide lenders with protection from any potential legal challenges as long as they properly verify a borrower’s ability to repay.
Common QM loans include conventional mortgages and FHA loans, which must follow certain credit scores, and income, employment and debt requirements.
Non-QM loans do not need to meet the same guidelines. This doesn’t mean that they aren’t quality loans or that they are high risk, but that they are an alternative lending solution for those who don’t meet traditional requirements.
While a QM loan requires pay stubs and W-2s, non-QM loans might require a combination of asset statements and bank statements to prove the borrower can repay the loan.
Who can use a non-QM loan?
Non-QM loans are perfect for borrowers who can’t easily prove their income with traditional documentation.
A strong QM-loan candidate is someone who may not know exactly what their income will be from year to year; but they have a good credit score, adequate savings and the income to comfortably pay their bills each month.
This might include those who are self-employed, business owners, contract workers, freelancers, seasonal workers, retirees or real estate investors.
If you have tried to get a conventional loan or government-backed loan from a mortgage lender and did not qualify, a non-QM loan may be right for you.
There’s an underserved market of borrowers who struggle to qualify for QM loans. Non-QM loans fill a gap for a hardworking group of people who aren’t able to prove their ability to pay through traditional requirements.
What are the pros and cons of a non-QM mortgage?
Every loan type has its pros and cons, depending on the unique needs of the borrower. Let’s take a look at the biggest pros and cons of non-QM loans.
Pros of non-QM loans
- Flexible income documentation requirements
- Flexible down payment, debt-to-income (DTI) and credit requirements
- Allow borrowers who may not otherwise qualify for a mortgage to receive funding
Cons of non-QM loans
- Higher costs and fees
- Higher interest rates
Non-QM loans aren’t for everyone. For the people who need them, these loans offer significant benefits and opportunities that certain borrowers may never be able to access with a QM loan.
As a result, the associated costs and fees usually are worth it to these borrowers.
How do I qualify for a non-QM mortgage loan?
The first step to qualifying for a non-QM loan is to find a lender who offers this type of loan.
Not all lenders offer non-QM loans, and each lender will approach the process and requirements a bit differently.
Compass Mortgage is proud to offer both non-QM loans and QM loans to qualifying borrowers. We want to meet a range of borrower needs, lifestyles and occupations.
While non-QM loans aren’t backed or insured by the government or any government-sponsored enterprise, non-QM lenders still must verify a borrower’s ability to pay back the loan.
Based on the type of work you do and your unique circumstances, Compass Mortgage lenders will work closely with you to determine the best combination of documentation to prove your income and ability to pay back the loan.
Get Committed with Compass Mortgage
Compass Mortgage has a Get Committed loan commitment program to help our borrowers navigate the complicated housing market and secure the lowest possible interest rate.
Get Committed provides a fully underwritten loan commitment and locks in your interest rate before you even find the property you want to buy.
A loan commitment essentially has the power of a cash offer, showing the seller you’re fully approved financially and that your deal isn’t likely to fall through.
We then are able to close on your loan in as fast as 15 days, because the only conditions left to clear are for the property you want to purchase.
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