Understanding Non Qualifying Mortgages
Updated: Apr 20
At some point, you may have heard about non qualifying mortgages, also known as non-QM loans. These types of mortgages are not backed by Fannie Mae or Freddie Mac, and they have different requirements than traditional mortgages. In this article, we'll explain what non-qualifying mortgages are, how they work, and who may benefit from them.
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What are Non Qualifying Mortgages?
A non-qualifying mortgage is a loan that doesn't meet the underwriting standards of the government-sponsored enterprises (GSEs) or the Consumer Financial Protection Bureau's (CFPB) Qualified Mortgage (QM) rules. Non-QM loans are offered by private lenders and may have higher interest rates and fees than conventional mortgages.
Non-QM loans may be designed for borrowers who don't fit the standard profile of a conventional mortgage borrower, such as self-employed individuals, foreign nationals, or borrowers with a high debt-to-income (DTI) ratio. Non-QM loans may also be used for investment properties, jumbo loans, or non-traditional property types.
These types of mortgages are offered by mortgage brokers and correspondent lenders. Mortgage brokers excel at handling these types of mortgages because they can originate a mortgage at a much lower cost. As a result, they can manage less profitable mortgage types than larger lenders with significantly higher overhead.
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How do Non-Qualifying Mortgages Work?
Non QM loans may have more flexible underwriting criteria than conventional mortgages, but they still require borrowers to provide documentation to support their ability to repay the loan. Non QM lenders may consider alternative sources of income, such as bank statements or rental income, and may accept a lower credit score or a higher DTI ratio than traditional lenders.
Non-QM loans may have different loan terms, such as interest-only or balloon payments, which may allow borrowers to lower their monthly payments or to pay off their loan faster. Non-QM loans may also have a shorter or longer loan term than conventional mortgages, depending on the lender's requirements.
What are some reasons to get a Non-Qualifying Mortgages?
Non-QM loans may be a good option for borrowers who don't meet the standard criteria for a conventional mortgage, but who have the ability to repay the loan. Non-QM loans may also be a good option for borrowers who need a loan for a non-traditional property type, such as a multi-unit property or a mixed-use property.
✔ Borrowers with hard-to-document income: These are individuals who may have irregular income streams or difficulty providing traditional proof of income. They could be self-employed, freelancers, or contractors.
✔ Non-warrantable condos: These are condominium properties that do not meet the guidelines set by Fannie Mae or Freddie Mac. Factors that might make a condo non-warrantable include a high percentage of rentals, a single entity owning a large portion of the units, or issues with the condo association's finances.
✔ Foreign nationals: These are individuals who are not U.S. citizens and do not have permanent residency status. They might be living, working, or investing in the U.S. on a temporary basis.
✔ No income verification mortgages: These are loans where the lender does not require the borrower to provide proof of income. They are often used by borrowers with irregular income sources.
All of these scenarios fall under the Non-QM (Non-Qualified Mortgage) umbrella. Non-QM loans are designed to help borrowers who do not meet the standard criteria for qualified mortgages.
Conclusion
Non-qualifying mortgages are a type of loan that may offer more flexibility than traditional mortgages, but may also have higher costs and risks. If you're considering a non-QM loan, it's important to do your research and to compare offers from different lenders. A qualified mortgage professional can help you understand your options and choose the best loan for your needs.
FAQ's
What is a non qualifying mortgage?
A non-qualifying mortgage, also known as a non-QM loan, is a type of mortgage that does not meet the requirements of a qualified mortgage (QM). Non-QM loans are not subject to the same consumer protection regulations as QMs, which gives lenders more flexibility in who they can lend to and what terms they can offer. This can be a good option for borrowers who have low credit scores or high debt-to-income ratios, but it is important to weigh the risks and benefits carefully.
Who is eligible for a non qualifying mortgage?
Non-qualifying mortgages are typically designed for borrowers who do not meet the requirements of a qualified mortgage. This could include borrowers with low credit scores, high debt-to-income ratios, or irregular income. Non-qualifying mortgages can also be a good option for borrowers who want to purchase a home with a low down payment.
What are the benefits of a non-qualifying mortgage?
There are several benefits to a non-qualifying mortgage, including:
Lower down payment requirements. Non-qualifying mortgages typically have lower down payment requirements than qualified mortgages. This can make it easier for borrowers to purchase a home.
More flexible income requirements. Non-qualifying mortgages typically have more flexible income requirements than qualified mortgages. This can make it easier for borrowers with irregular income to qualify for a loan.
More lenient debt-to-income ratios. Non-qualifying mortgages typically have more lenient debt-to-income ratios than qualified mortgages. This can make it easier for borrowers with high debt-to-income ratios to qualify for a loan.
What are the drawbacks of a non-qualifying mortgage?
There are also some drawbacks to a non-qualifying mortgage, including:
Higher interest rates. Non-qualifying mortgages typically have higher interest rates than qualified mortgages. This is because non-qualifying mortgages are considered to be riskier investments for lenders.
Prepayment penalties. Non-qualifying mortgages may have prepayment penalties. This means that you may have to pay a fee if you pay off your loan early.
Shorter terms. Non-qualifying mortgages may have shorter terms than qualified mortgages. This means that you will have to pay off your loan sooner.
What should you consider before taking out a non-qualifying mortgage?
If you are considering taking out a non-qualifying mortgage, it is important to carefully consider all of the risks and benefits involved. You should also compare different lenders and loan options to find the best deal for you.
Philip Bennett
Philip is the owner and Licensed Mortgage Broker at Bennett Capital Partners, Bus. NMLS # 2046828. He earned his degree in Accounting and Finance from Binghamton University and holds a Master's Degree in Finance from NOVA Southeastern University. With more than 20 years of experience, Philip has been a leader in the mortgage industry. He has personally originated over $2 billion in residential and commercial mortgages.
Learn more about Philip Bennett's background and experience on our Founder's page. Whether you're a first-time homebuyer or a seasoned real estate investor, our team is here to help you achieve your real estate goals. Don't wait any longer, contact us today and let us help you find the right mortgage for your needs.
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