A Non-QM loan is also referred to as a non-qualified mortgage. It is a sort of mortgage loan that allows you to qualify for a loan using nontraditional ways rather than the usual income verification required by most lenders.

Bank statements and the use of your assets as income are two common examples of these loans. Non-QM loans even provide real estate investment prospects to a broader variety of people due to their more flexible qualifying requirements.

Non-qualified mortgage (Non-QM) loans are a different type of loan to qualified mortgage (QM) loans. A Non-QM loan is one that does not have to follow the federal government and the Consumer Financial Protection Bureau’s (CFPB) qualified mortgage requirements.

Benefits of Non-QM loans

Here are some of the most notable advantages on Non-QM loans.

• You don’t need personal income calculations
• They have greater underlying flexibility
• In some cases, you don’t need to show proof of your job history
• You need as little as 10 percent down payment
• In some cases, no reserves are required
• They accept credit scores as low as 620, and 580 with compensating factors
• They have a low debt-service-coverage ratio (DSCR) on investment properties
• They count rental income, including VRBO and Airbnb

Such benefits make these types of loans suitable for real estate investors and potential homeowners.

QM loans requirements

To create more predictable borrowing restrictions, the CFPB has devised a set of standards for QM loans. These are designed to keep borrowers from getting into loan agreements they can’t afford to pay back.

These stronger laws were put in place in 2014 as a result of the Great Recession, which ran from 2007 to 2009 and saw many borrowers default on their subprime mortgages, forcing them into foreclosure. This not only had a long-term impact on the economy, but it also harmed the credit of many people.

Here are some of the requirements for qualified mortgage loans

• They have a maximum loan term of 30 years or less
• The points and fees are 3 percent or less that your total loan amount
• There’s no negative amortization, balloon, or interest-only loans

Based on these stringent requirements, some people may not qualify for QM loans, especially those who appear to lack the ability to repay the loans as required. Fortunately, Non-QM loans act as an alternative, enabling potential homeowners to acquire the house of their dreams. However, Non-QM loans also have specific requirements that are put in place to protect both borrowers and lenders.

Non-QM mortgage risks

Despite being a viable option for most borrowers, Non-QM mortgages also have some risks. The main risk of a Non-QM mortgage is that you won’t be able to repay it if your financial situation changes dramatically. This is especially concerning if there is another economic downturn. Defaulting on any loan, though, is always a possibility.

Non-QM loans, on the other hand, provide a middle ground for borrowers who would otherwise have no options or be bound by unreasonably high interest rates, significantly increasing the loan’s cost.

Who needs to consider getting Non-QM loans?

Property acquisition is already a complicated and time-consuming procedure. If you’re then unable to obtain a conventional loan, the situation might rapidly become aggravating. But QM loans aren’t your only option.

If you’ve been turned down for a typical QM loan, a Non-QM loan might be the way to go. If you have good cause to suspect you will not qualify for a QM loan merely based on your credit, income, or other considerations, you might want to seek a Non-QM loan. Here are the most common type of borrowers for Non-QM loans.

• Real estate investors
• Self-employed persons
• SME owners
• Retirees who would like to buy a second home that’ll not serve as their main residence
• Borrowers who are interested in more flexible DSCR requirements and interest-only payments
• Individuals who have experienced a recent credit event, such as a short sale, bankruptcy, or foreclosure
• Non-prime or subprime borrowers that miss the requirements for a QM loan and want funding at the moment.

Things to look out for in a Non-QM loan

As a borrower, you want the best terms possible, including the lowest interest rates imaginable. While it may appear apparent to choose the loan with the lowest interest rate, this is not necessarily the best option in the long run.

You should inquire about the loan’s associated expenses and make sure that the mortgage package is the greatest fit for your needs. The first step in selecting a Non-QM loan that matches your needs is to educate yourself about your loan possibilities.