How Do Non-QM Loans Work?

Buying a home is part of the American dream, but what if you don't qualify through traditional means? This is an issue that self-employed and other non-W2 workers often face since their proof of income and employment differs from what lenders typically require.

The good news is that those who don't meet the criteria for a qualified mortgage can be offered a non-qualified mortgage instead. Let's explore the non-QM loan option and see if this is the right choice in your situation.

What is a Non-QM loan?

Non-qualified loans are designed to help homebuyers who don't meet the standard requirements to qualify for a mortgage. They feature more flexible eligibility requirements on DTI, credit scores, and loan amounts.

To better understand what a non-qualifying loan is, let’s review the list of requirements for a traditional mortgage:

Income. You must provide pay stubs, W2s, and tax returns to verify your income.

DTI. This is the amount of your monthly income that is paid toward existing debts. Your debt to income ratio should be 43% or lower.

Fees. Your loan fees and points can't be more than 3% of the loan amount.

Term. The loan term must be 30 years or less.

If you can't provide the aforementioned things, a non-qualifying mortgage is worth exploring. It should be noted that non-QM loans are not government-backed or part of Fannie Mae or Freddie Mac.

Benefits of Non-QM loans

Non-QM loans make mortgages more accessible to a broader market. They also require less formal documentation compared to other types of loans. You don't need to submit W2s, tax returns, or employment verifications. Bank statements and a list of assets are often enough for loan approval.

Minimum credit scores for non-QM loans can be up to 100 points lower than qualified mortgages and feature more flexible terms, which are not available in most qualified mortgages. Even a 40-year loan term!

Should You Get a Non-Qualified Loan?

A non-QM loan is a good option when you have a stable income that allows you to make regular, on-time mortgage payments but can't meet a qualifying mortgage requirement. This is often the case with:

Freelancers

Doctors

Consultants

Lawyers

Real estate agents

Small business owners

Retirees

Borrowers with high assets and low income

Borrowers with high DTI

Borrowers with low credit scores

There has been a misconception that Non-QM loans are bad loans and borrowers should avoid them. The truth is, similar to qualified mortgages, today's non-QM loans have their own set of guidelines. The lending process is the same apart from the loan documents needed.

Where to get Non-QM loans

Because of the financial risk involved in providing loans that are not backed by federal government programs, non-QM loans are less widely available. And just like any other loan, non-QM loans have their pros and cons.

If you'd like to learn more about non-QM loans or explore other home financing options, please contact us! Many options and means are available to help you qualify for a mortgage.

* Specific loan program availability and requirements may vary. Please get in touch with the mortgage advisor for more information.