What Is a Non-QM Mortgage and How to Get One?

Written by Banks Editorial Team
4 min. read
Written by Banks Editorial Team
4 min. read

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Are you ready to begin your home buying process but have no idea how you’ll finance your purchase? If you’re a W-2 employee, you can easily qualify for a traditional mortgage. 

What happens if you’re a gig worker, independent contractor, or small business owner? Most lenders consider these kinds of jobs as self-employment. As a self-employed borrower, it’s hard to get a conventional mortgage, otherwise referred to as a qualified mortgage.

However, you can get a non-qualified mortgage, a funding solution for self-employed individuals who want to pursue their dream of homeownership. Here’s how non-QM loans work, how they differ from QM loans, the pros and cons, and how to get one.

Traditional and NQ Mortgage Loans

Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

What Is a Non-QM Mortgage and How Do They Work?

A non-QM or non-qualified mortgage is a mortgage loan that doesn’t meet the lending requirements set by Dodd-Frank Act. These regulations were passed in 2010 to ensure that borrowers can repay their loans and prevent a repeat of the subprime mortgage crisis seen in the 2008 housing market crash. 

Not everyone satisfies the federal requirements for a conventional mortgage, and for this reason, a non-qualified mortgage may be helpful. So whether you’re a self-employed borrower, freelancer, or a small business owner looking to purchase your dream home but don’t qualify for a traditional mortgage, a non-QM might be a great option to realize your dream of homeownership.

When you apply for a non-QM loan, lenders typically don’t look at your income, debt-to-income ratio, and other requirements that qualified mortgages check, making them a good option for borrowers with fluctuating income. One major downside, though, is that you won’t enjoy the same regulatory protection that comes with qualified mortgages.

What is the Difference Between a Qualified vs. Non-Qualified Mortgage?

Qualified mortgages are loans that meet the requirements set by the Consumer Financial Protection Bureau (CFPB). These loans are backed or insured by government-sponsored agencies like Fannie Mae or Freddie Mac and the Federal Housing Administration.

On the other hand, a non-QM mortgage is a more flexible form of financing that allows homebuyers to secure a mortgage if they don’t meet the requirements for a qualified mortgage. Unlike QM mortgages, non-QM loans aren’t backed by any government program.

Here’s a quick overview of the difference between qualified and non-qualified mortgages.

Qualified MortgageNon-Qualified Mortgage
Mortgage loans backed by government programs like VA, FHA loans, Fannie Mae, or Freddie MacAren’t guaranteed by any government program
Lenders must follow ATR/QM rulesLenders do not need to follow ATR/QM rules 
Borrowers must document incomeNo income verification requirements
Borrowers must meet a credit score and DTI threshold to qualifyNon-QM lenders have lenient requirements
Interest rates for qualified mortgage loans conform with the industry standardsInterest rates are typically higher than traditional mortgages.

Most Common Requirements for Non-QM Mortgage

The requirements for a non-QM mortgage vary depending on the lender. Generally, most mortgage lenders require the following:

  • A decent credit score
  • At least 50% DTI ratio (varies by lender)
  • Two years of proof of self-employment
  • 12 to 24 months of personal or business bank statements (for some)
  • Business license and any other documentation related to your business

Traditional and NQ Mortgage Loans

Are you looking to finance a home too expensive for a conventional loan? An Angel Oak Jumbo Loan can provide financing for up to $3.5 million.

Who Are Non-QM Mortgages Best For?

Non-qualified mortgages are best for borrowers who do not meet the requirements for conventional mortgages. The following people may benefit from non-QM mortgages:

  • Self-Employed Individuals: Anyone who is not an employee of a company is considered “self-employed.” Such people find it hard to document their income since it fluctuates, making non-QM loans their best option.
  • Business Owners: Whether you’re running a startup or an established business, you’ll always find it hard to get a qualified mortgage since you require more paperwork to verify your income. A non-QM loan is thus best for business owners looking to get approved for a mortgage.
  • Unconventional/Contract Workers: If you’re a contract worker or 1099 employee, a non-qualified mortgage loan can help you get a loan to purchase or refinance your home.
  • Foreign Nationals: Government-backed loans usually require a Social Security number or a W-2. Since non-QM mortgages don’t have such requirements, foreign nationals can pursue their dream of homeownership in the United States.
  • People With Poor Credit: Lenders will often look at your credit score when deciding whether to give you financing and the interest they should charge on the loan. If your credit score is below the lender’s threshold, a non-QM loan might be a perfect fit.
  • People With High Debt: Lenders typically don’t give loans to borrowers with more than 50% DTI since they are seen as individuals who can’t manage their monthly payments. Getting out of that much debt can take years and further push your dream of homeownership. A non-qualified mortgage can help you purchase or refinance your home while managing debt.

Pros of Non-QM Mortgages 

A non-QM loan comes with several advantages, including

  • Flexible Requirements: Qualified mortgages require you to meet a series of requirements, such as a 43% DTI ratio and a certain minimum credit score, to get approved for a loan. With a non-QM mortgage loan, though, you don’t need to satisfy all these requirements.
  • No Income Calculations: Most mortgage lenders require proof of income to prove your ability to repay your loan. However, non-QM lenders require no income verification to qualify for a mortgage.
  • More Lenient Application Process: Generally, the application process for non-qualified loans is lenient compared to those of qualified mortgages. Plus, it takes a couple of days to get approved, and funding is also faster.
  • More Loan Options: Non-QM mortgages offer a wide variety of mortgage products, including bank statement loans, asset-based loans, investor cash flow loans, foreign national loans (ITIN), and more.
  • Allows Higher Debt-to-Income Ratio: Your DTI ratio determines your ability to pay your monthly payments. Most conventional loans require a 43% or lower DTI ratio, but you can still qualify for a non-QM mortgage even with a higher DTI ratio.

Cons of Non-QM Mortgages

  • Higher Interest Rate: One major disadvantage of non-QM mortgages is the higher interest rates. Non-QM lenders charge higher rates to offset their lending risk. 
  • Higher Costs and Fees: Since non-QM loans aren’t backed by any government program, there’s no restriction on how much lenders can charge on these loans. Apart from the higher interest rates, you may also end up paying other hefty fees, such as closing costs. You may also need to pay expensive origination fees. 
  • Greater Risk of Default: Non-QM mortgages are interest-only loans, which may increase your risk of defaulting. Defaulting on monthly mortgage payments may lead to foreclosure.
  • Not Widely Available: Not all lenders offer non-qualified mortgages since they are considered risky.

How To Get a Non-QM Mortgage

Are you looking for a non-QM lender? Angel Oak Home Loans is a full-service lender that offers various non-qualified mortgage products to homebuyers who do not qualify for a conventional mortgage. You can get the following non-QM loans through Angel Oak Home loans:

Submit a simple online form to get a non-QM mortgage quote or find a loan officer who will guide you through the application process.

Angel Oak

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