A Non-QM mortgage is a Non-Qualified Mortgage loan. A conventional mortgage, FHA, or VA loan are all considered qualified mortgage loans. In 2014, the Consumer Finance Protection Bureau (CFPB) adopted new rules that defined qualified mortgages (QM). This gave mortgage lenders protection on loans that met standards set by the federal government. This reduced the risk with fewer mortgages ending up being delinquent or in foreclosure. Also, the CFPB began the Ability to Repay minimum standards. After the new CFPB rules were adopted, loans that did not stick to QM standards were found to be non-QM loans.
A loan that is non-QM is not necessarily a higher risk loan. It just means that loan does not follow the QM definition. Generally, non-QM loans are designed today to offset some of the risks of the past.
The following are good examples of non-QM loans today:
- Interest only: These loans were very popular in the past, but today they are not QM loans
- Higher debt to income ratios: Jumbo loans that are more than 43% DTI are usually non-QM loans. However, some loans with higher DTI that are backed by FHA, Fannie Mae or Freddie Mac may qualify as QM loans.
- Asset Programs: The borrower does not have regular income but has sufficient investments and liquid cash to make mortgage payments. Assets may be stocks, bonds, IRAs, cash, 401ks, etc.
- Non-QM loans can be helpful for the borrower who is self-employed. It requires you to have at least two years of steady employment history. Also, for this type of loan, the qualifying income is based upon 12 months of bank statements instead of tax returns.
- Non-QM loans generally require shorter time for a prior bankruptcy or foreclosure and in many cases will allow lower credit scores and is more forgiving of negative credit events
- Non-QM programs include Stated Income mortgage programs and mortgages that only look at the Debt Service coverage ratios are available for investors.
Why Non-QM Loans and Non-Traditional Mortgages Are Coming Back
Non-QM loans are becoming easier to get as the fiscal crisis recedes in the rear-view mirror. They are a good financial tool because they help people who cannot otherwise qualify for a conventional, FHA, or VA loan to get a mortgage. These programs allow for alternate documentation for income, allow for lower credit scores, and can be more forgiving of negative credit events. Because these loans carry more risk, they tend to have higher interest rates. You will see rates range 1% to 4% above conventional interest rates depending on specific circumstances. But for some, this will not be a hinderance because it allows them to accomplish their goals.
For more information on the mortgage options that are currently available, contact us and we can work with you to evaluate all your options and identify the mortgage that fits your situation.