A non-qualified mortgage — or non-QM — is a home loan that is not required to meet agency-standard documentation requirements as outlined by the Consumer Financial Protection Bureau (CFPB). That means they don’t satisfy one or more of the following requirements:
- The points and fees for loan amounts of $100,000 or more are less than or equal to 3%
- The loan cannot have risky features like negative amortization, interest-only payments or a balloon payment
- The term of the loan must be 30 years or less
- The debt-to-income (DTI) ratio must be 43% or less
What are the benefits of non-QM loans?
If you’ve found your dream home but were denied a home loan, a non-QM product may be worth considering. A non-qualified mortgage may provide a temporary lending solution until you meet standard mortgage guidelines and can refinance to a traditional loan.
Non-QM lenders offer more loan options for:
BORROWERS WHO ARE SELF-EMPLOYED
Instead of tax returns, non-QM lenders offer bank statement mortgage loans. With 12 to 24 months’ worth of personal or business statements, the lender evaluates deposits to determine your qualifying income.
BORROWERS WITH HIGH NET-WORTH
Some lenders offer asset depletion programs. By dividing your total cash balance by a lender-chosen time period, the asset is counted as income. For example, a $200,000 savings balance may be converted into $833.33 of extra monthly qualifying income with a typical 20-year asset depletion loan term.
BORROWERS INVESTING IN MULTIPLE RENTAL UNITS
Non-QM loans come in handy if you’re building a portfolio of investment properties but already own 10 mortgaged properties — the limit for most conventional lenders. Some lenders also offer debt-service coverage ratio loans for real estate investors. If the rent on the new home covers the monthly payment, you won’t need to verify any other income to qualify.
BORROWERS WITH RECENT BAD CREDIT
You may qualify for a non-QM loan one day after completing a bankruptcy or foreclosure. For standard loan programs, you typically need to wait two to seven years after a significant credit event.
BORROWERS WHO ARE FOREIGN NATIONALS
A foreign national is a citizen of another country who lives in the U.S. for brief periods for work or vacation. Non-QM loans for foreign nationals may not require proof of U.S. income, credit or a Social Security number.
BORROWERS WHO WANT AN INTEREST-ONLY PAYMENT OPTION
If your income is sporadic, an interest-only loan gives you a lower payment option during times of the year when you earn less. Qualified mortgage rules prohibit them, and with good reason: Your payment could increase after the interest-only period ends, making the loan harder to repay.