Are you a first-time homebuyer or new to real estate investing? Are you struggling to qualify for a mortgage to finance a purchase because you don't meet the strict borrowing criteria? Maybe it's because you're self-employed or don't have the necessary documents to get a traditional mortgage. If you answered 'yes' to either of the above questions, stick around. You'll find out exactly what a non-QM is and how you can get a home loan without all the red tape.
What is a Non-Qualified Mortgage (non-QM) loan?
Before defining what a non-QM is, you need to know the first thing lenders call into question when you want to take out a loan. How reliable are you as a borrower? It's not enough to give them your word; you need to prove it through factual evidence or representations.
These include your credit history, liquid assets, rental income, bank statements, etc. Traditionally, to qualify for a mortgage, you had to meet a strict criterion outlined by the CFPB. They include:
- Income: Have a verifiable source of income. That includes tax returns, W-2s, pay stubs, etc.
- Debt: Your debt-to-income (DTI) ratio must typically be equal to or less than 43%. That means that the percentage of your income paying debts shouldn't be more than 43%. It's a general way for mortgage companies to ensure that you aren't biting off more than you can chew financially.
- Fee Limits: Fees and points for servicing your loan shouldn't exceed 3% of the total loan amount.
- No Risky Loans: That is, balloon payments, negative amortizations, and interest-only loans.
- Loan Term: the loan repayment period shouldn't exceed 30 years.
What if you don't meet the above criteria?
That's where non-QM mortgages come in. They're mortgage products designed to help you finance your home when you don't qualify for a traditional mortgage loan. Simply put, they are a great alternative to a conventional mortgage loan.
They don't have to adhere to the strict guidelines set by the CFPB and the federal government for qualifying mortgage borrowers. With a Non-QM mortgage loan, you can be eligible for a home loan using alternative methods of verifying your reliability as a borrower.
For example, you can use your current assets as income, bank statements, etc. Are you self-employed and absorb business expenses onto their personal tax returns? Do you have multiple streans of income? Are you paid in lump sums? Then, non-QM loans might be a solution worth exploring, as they are more flexible with income verification methods, allowing more people to break into real estate investing.
Benefits of a Non-QM loan
Some of the reasons why non-QM loans have grown in popularity are:
- Offers more underwriting flexibility
- Overcome the need of a traditional job history (gig workers, freelance consultants, retirees, self-employed, foreign nationals. buyers who live off investments etc)
- A decreased need to have huge cash reserves
- Increased flexibility for qualifying with a lower credit score
- You may not need a large down payment
- They offer a low debt-service-coverage (DSC) ratio for investment properties
- They can count rental income such as VRBO and Airbnb
What's more, non-QM loans can be convenient when you need to take advantage of a real estate deal. And for most property investors and potential home buyers, they are sometimes the only option for making property investment a possibility.
Downsides or Risks of non-QM
The most significant risk of non-QM loans, like every other loan, is the default risk for the financial institution. Because of this increased risk, interest rates and fees are typically higher. Additionally, Non-QMs cannot be sold to Fannie Mae and Freddie Mac.
That said, non-QM loans are a great option for borrowers who don't qualify for the traditional mortgage. And with the changing landsape. increasing numbers of consumers are choosing non-QM loans as their mortgage option of choice. If that sounds like you, click here to learn more, or click here to connect with our non-QM loan experts, and they will help make that dream home or property a reality.
