What Is a Non-QM Loan?

A Non-QM loan, or a non-qualified mortgage, is a type of mortgage loan that allows you to qualify based on alternative methods, instead of the traditional income verification required for most loans. Common examples include bank statements or using your assets as collateral. Because of the more flexible qualification requirements, Non-QM loans open up real estate investment opportunities to a broader group of individuals.

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Non-QM vs. Qualified Mortgage

Non-QM loans are an alternative to a qualified mortgage (QM) loans. More specifically, a Non-QM loan is one that is not required to meet the federal government and Consumer Financial Protection Bureau’s (CFPB) guidelines for qualified mortgages.

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Qualified Mortgage Requirements

The CFPB has established a set of rules for QM loans to provide more stable borrowing requirements. These are meant to protect borrowers from entering loan agreements that they cannot afford to repay. These stricter regulations were established in 2014 in response to the Great Recession that lasted from 2007 to 2009, during which many borrowers defaulted on their subprime mortgages and were forced into foreclosure. This not only had a long-lasting effect on the economy but damaged many individuals’ credit.

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Highlights of Updated QM Requirements

• Points and fees that are 3% or less than the total loan amount

• Maximum loan terms of 30 years or less

• No negative amortization, interest-only, or balloon loans
  
  Non-QM Mortgage Benefits

• Non-QM loans are favorable to borrowers for many reasons, including:

• Non-QM Mortgage Benefits

• Greater underwriting flexibility

• No personal income calculations are required

• No job history is required (in some cases)

• As little as 5% down required

• No reserves required (in some cases)

• Credit scores as low as 620 allowed (580 w/ compensating factors)

• Low debt-service-coverage ratio (DSCR) on investment properties

• Counting rental income (including Airbnb & VRBO)

• For many potential homeowners and real estate investors, Non-QM loans are the only way to make investment opportunities plausible. As you well know, real estate opportunities don’t always linger on the market for long. A Non-QM mortgage can make it possible to make a timely purchase.
  
  Non-QM Mortgage Risks
  The primary risk of a Non-QM mortgage is not being able to pay back the loan should your financial circumstances drastically change. This is particularly of concern if there is another economic recession. However, defaulting on any loan is always a risk. However, 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.