If you’re shopping for a mortgage, you’ve probably come across these two types: qualified and non-qualified mortgages. Qualified mortgages or QM loans are mortgage products protected by the Consumer Financial Protection Bureau. They were created after the 2008 housing market meltdown to ensure that borrowers could repay their loans.
With the strict lending requirements put in place by the federal government, you may not qualify for a QM mortgage if you don’t meet the standards set by Fannie Mae and Freddie Mac. However, you may be eligible for non-QM loans.
Find out what non-QM loans are, how they compare with conventional loans, and whether you should get one.
Traditional and NQ Mortgage Loans
What is a Non-QM Loan?
A non-qualified mortgage, in short, a non-QM loan, is a loan product that doesn’t conform with the lending guidelines set by CFPB. They are exclusively designed for home buyers who can’t conform to the stringent requirements for a qualified mortgage.
Real estate investors, foreign nationals, self-employed individuals, and credit-challenged people may find it difficult to qualify for a conventional loan. This is where a non-QM loan can be helpful. It is a financing solution designed to help a particular group of borrowers to achieve their dream of homeownership.
Non-QM vs. Conventional Loans
Conventional loans are mortgages not backed by the federal government. Instead, they are available through private lenders, such as banks, credit unions, and mortgage companies. This loan type has stricter lending requirements than non-QM loans and government-backed loans like FHA loans. It also means that if you have a low credit score, getting approved for a traditional loan might be difficult.
Non-QM loans, on the other hand, have lenient lending requirements compared to conventional loans. This is because they don’t meet the federal government and CFPB guidelines for qualified mortgages. It’s therefore easy to qualify for non-QM mortgages.
Should You Get a Non-QM Loan?
A non-QM loan has flexible terms, lenient credit requirements, and requires less documentation, making it a great mortgage option for:
- Borrowers with less-than-stellar credit
- Self-employed borrowers
- Real estate investors
- Foreign nationals
- Small business owners
- People with a high DTI ratio
- Gig workers
- Independent contractors
If you’re wondering whether non-QM loans are safe, the good news is that they are not like subprime mortgages that existed a decade ago. Unfortunately, the Great Recession housing crisis resulted in the misconception that non-QM loans are bad.
Today’s non-QM loans have lending guidelines. In fact, the lending process is similar to that of qualified mortgages except for the documentation required.
Pros and Cons of Non-QM Loans
As with any other loan product, a non-QM mortgage has downsides and upsides. Weighing the pros and cons will help you make an informed decision.
- Lenient Credit Requirements: One of the major benefits of non-QM loans is that borrowers with low credit scores (even below 500) get the opportunity to pursue their dream of home ownership.
- Less Formal Documentation: Non-QM lenders also have flexible documentation requirements. They typically don’t need tax returns, W-2s, or income verification. Some lenders don’t even require income documentation but may request alternative documentation like bank statements, profit and loss statements, and liquid assets to verify your income.
- Flexible Terms: Unlike qualified mortgage loans, you can get extended loan terms exceeding 30 years, interest-only payments, and even negative amortization with non-QM loans.
Traditional and NQ Mortgage Loans
- High-Interest Rate and Fees: Non-QM loans usually come with high-interest rates and fees due to the lending risk associated with this type of mortgage. This means you may end up paying more in interest.
- Difficult to Find: Not all mortgage lenders offer non-QM loans, so they may be harder to find. You can shop around for non-QM lenders online and do your research before working with one.
- Greater Risk of Default: Non-QM loans such as interest-only mortgages, where you’re required to pay only interest on the loan over a certain period of time, may increase your risk of defaulting.
- Higher Down Payments: Down payments for non-QM mortgage loans are usually higher than other mortgage products. Lenders require a sizable down payment to lower their lending risk in case you default.
Types of Non-QM Loans
There are several types of non-QM mortgage products. Depending on your personal situation, you can qualify for any of these loan products.
Asset Qualifier Home Loan
An asset qualifier home loan is a loan product that allows you to get a mortgage against your liquid assets instead of income. Liquid assets can include your bank accounts, such as checking and savings, retirement, or investment accounts. If you have a lot of assets but generate little to no income, an asset qualifier home loan might be a good option.
Bank Statement Loan
A bank statement loan allows self-employed borrowers to access a home loan using a bank statement instead of tax returns, W-2s, or pay stubs. They are also referred to as self-employed mortgages or alternative documentation loans.
Bank statement loans are ideal for self-employed individuals with no steady income or more than one employer, and proving your income can be difficult.
Investor Cash Flow Home Loan
If you’re a real estate investor looking to grow your investment portfolio, you can use the cash flow from your property to secure a mortgage loan. Depending on the lender, you don’t need to provide tax returns or employment information to get an investor cash flow loan.
1099 Income Loan
1099 income loan is a loan product for 1099 earners who do not qualify for a full doc mortgage. This can include freelancers, independent contractors, gig workers, or any other individual who files W-9. Borrowers can use their 1099 earning statements rather than tax returns to verify their income and be eligible for a mortgage loan.
ITIN Mortgage Loan
An Individual Tax Identification Number (ITIN) mortgage is a loan program for borrowers who are not eligible for Social Security numbers. ITIN is typically used in place of SSN for identification purposes. This type of loan gives immigrants the opportunity to own a home in the United States. Requirements for an ITIN mortgage vary by lender.
Foreign National Program
Foreign nationals can find it difficult to purchase or refinance a home in the U.S. due to a lack of documentation. Fortunately, foreign national programs can help non-citizens or individuals who consider themselves resident aliens to purchase a primary residence, second home, or investment property.
Jumbo Home Loan
A Jumbo home loan is a mortgage that exceeds the amount set by Fannie Mae and Freddie Mac or the Federal Housing Agency. A loan is considered a Jumbo loan if it exceeds the loan-servicing limit, currently $647,200 for a single-family home in 2022. This loan product is a perfect fit for homebuyers looking to purchase or refinance higher-priced properties.
Where Can You Get Non-QM Loans?
Non-QM loans are often offered by online lenders like Angel Oak Home Loans. You can qualify for any of the above types of non-QM loans. The good thing is that Angel Oak Home Loans have a seamless online application, and loan approval and funding are also faster. Get a free quote and move one step closer to owning your dream home.