Non-QM Loan Programs

What Is a Non-QM Mortgage?

A non-QM mortgage is a non-qualifying mortgage. To understand what a non-QM mortgage is, first you need to understand what a qualifying mortgage is. Qualifying mortgage standards are designed to prevent high-risk lending because high-risk lending can be bad for borrowers, lenders, and the overall economy.

A qualifying mortgage:

• Limits your debt-to-income ratio. Your total debts (including housing payments) can’t exceed a certain percentage of your income.
• Limits non-traditional loan structures. Loans that exceed 30 years, interest-only loans, and balloon payments are considered non-traditional.
• Requires that you have full documentation of your income, credit, and employment. This is intended to ensure that you can repay the loan.
• Reduces the number of lender fees. This improves the general affordability of the loan. Lending fees can’t exceed 3% of the loan amount for most loans.

In summation, a qualifying mortgage is one that is well-documented, affordable, and conventional. But, that’s not always the loan that a borrower might need. Borrowers may not be able to meet any of these qualifying standards, and will consequently need a non-qualifying mortgage. That doesn’t mean that the borrower isn’t in good shape: it just means they aren’t able to meet these specific lending standards.

A non-qualifying mortgage is a mortgage that doesn’t meet any of these criteria. It isn’t necessarily riskier or more expensive, it just doesn’t meet the requirements that are set out for a qualifying mortgage.

Why Would You Need a Non-Qualifying Mortgage Loan?

Anyone who is a non-traditional borrower could need a non-qualifying mortgage loan. This includes:

• Self-employed individuals who aren’t able to qualify based on their documented income. Entrepreneurs and self-employed individuals may have complex income pictures and aren’t likely to have W2s and other easily stated income.
• Entrepreneurs who have a high debt-to-income ratio due to their investments. If money is wrapped up in investments, it may not appear to be money that the entrepreneur has access to. Though loans may be making the entrepreneur money, it may look as though the entrepreneur is over-leveraged. 
• Individuals who need non-standard loan terms, such as interest-only payments. If an individual can’t qualify for the house they want, they may instead want to look into alternative types of lending structure, so that they can get the property they want.

To many lenders, these non-qualifying loans would be higher risk. But an individual can end up not qualifying for a traditional mortgage loan simply through having income that’s not traditionally documented.

Non-qualifying mortgage loans can be tailored to the borrower because they don’t need to follow the above four requirements (though there are still regulations that need to be followed).

How Do You Get a Non-Qualifying Mortgage?

Though a non-qualifying mortgage doesn’t verify income the same way that a qualifying mortgage does, it still does determine whether the borrower can repay their loan. A non-qualifying mortgage may still have requirements, such as income, credit, and down payment requirements. The standards will vary by lender.

As mentioned, non-qualifying mortgages aren’t necessarily higher risk. In fact, a non-QM can even be lower risk, if the lender is strict. While a lender might not require documentation for income, they may require exceptionally high credit scores or high amounts of liquid cash in the bank. Since the borrower cannot qualify through conventional lenders, a non-QM lender may be able to increase their general requirements.

Finding a non-QM mortgage might be a little more complex than finding a QM mortgage, for several reasons. Fewer lenders provide non-QM mortgages, which means you may need to do a little digging. Further, since non-QM products have more of a variety to them, it may take some work to find a mortgage that is the right fit.

A non-QM mortgage is a mortgage that doesn’t adhere to federal guidelines. While these guidelines are intended to reduce risk, a non-QM mortgage isn’t inherently riskier, it’s just less conventional. If you don’t qualify for a QM mortgage, you may need to look into non-QM lenders. But you should also be aware that these mortgage products can vary significantly, and it may take work to find the mortgage product that is right for you.