A non-qualified mortgage (non-QM) doesn’t adhere to the lending standards set out by the Dodd-Frank Act. These regulations were originally issued to ensure borrowers have the ability to repay their loans and to prevent a repeat of the subprime mortgage crisis seen during the Great Recession.
Essentially, a non-QM loan is a type of mortgage loan that allows a borrower to qualify based on alternative methods, instead of the traditional income verification required for most loans. Because of the more flexible qualification requirements, non-QM loans open up real estate investment opportunities to a broader group of individuals.
Applicants whose incomes vary from month to month, such as freelancers and other types of self-employed borrowers, may qualify for these types of mortgages. Non-qualified mortgages are best for borrowers who can’t meet the requirements of traditional mortgage loans – such as traditional income qualification or a minimum credit-score.
Advantages of Non-QM Mortgage Loans
- Limited income and financial documentation needed
- Accommodates higher Debt-to-Income ratios for borrowers
- Lower credit scores allowed
- Greater underwriting flexibility
- No savings or reserves required (in some cases)
- Flexibility of interest-only loan options
- Allow non-salaried and other unconventional workers to buy or refinance a home
The major advantage of non-QM loans is that they open the door to borrowers who may not otherwise qualify for a mortgage. These also may require less formal documentation than other loans.
Non-QM loans do not typically require documents such as W-2s, tax returns, or an employment verification letter in order to qualify for these mortgages. They also come with more flexible terms, including balloon payment options and 40-year loans, which aren’t available on most qualified mortgages.
Disadvantages of Non-QM Mortgage Loans
- Higher interest rates
- Not readily available
- Sometimes come with high costs
- Often times feature a prepayment penalty for the first 1-3 years
By maintaining reasonable lending standards while preserving flexibility, Non-QM loans offer a middle ground for borrowers who would otherwise have no options or be saddled with unreasonably high interest rates that drastically increase the expense of the loan..
If you’re considering a non-QM and have some questions, give us a call at (760) 930-0569 and we will help to evaluate if this is a viable option for your mortgage loan needs.