What is a Non-Qualified Mortgage?
A non-qualified mortgage (non-QM) is a type of home loan that doesn't meet the standards set by the Consumer Financial Protection Bureau's (CFPB) regulations on qualified mortgages. These regulations, established after the 2008 financial crisis, aim to ensure that lenders issue mortgages that borrowers can reasonably afford to repay.
Non-QM loans don't comply with certain requirements set by the CFPB, such as debt-to-income ratio limits or documentation standards. They are typically used for borrowers who may not meet the stringent criteria set for qualified mortgages. Borrowers who are self-employed, have non-traditional income sources, or have high net worth but irregular income streams might find non-QM loans more accessible.
Non-QM loans often come with features like interest-only payments, flexible terms, higher debt-to-income ratios, or lower credit score requirements.
Non-Qualified Mortgage Products
Interest-Only Mortgages: These loans allow borrowers to pay only the interest for a specified period, usually the initial years of the loan term. After the interest-only period ends, borrowers start paying both principal and interest.
DSCR (Debt-Service Coverage Ratio): This loan is a type of commercial real estate financing used for income-producing properties. This loan evaluates a property's ability to generate adequate income to cover its debt obligations, such as mortgage payments. The DSCR, calculated by dividing the property's net operating income (NOI) by its debt service (principal and interest payments), indicates whether the property generates enough income to meet its debt payments. Lenders typically prefer DSCR values above 1.0, with higher values indicating stronger financial health. DSCR loans focus on the property's income potential rather than solely relying on the borrower's creditworthiness, making them common for commercial property investors seeking financing. Can Close in LLCs
Bank Statement Loans: Ideal for self-employed individuals or those with non-traditional income sources, these loans use bank statements instead of tax returns to verify income. They consider deposits over a certain period, typically 12–24 months, to determine eligibility.
Asset Depletion Loans: Borrowers with significant assets but lower income might qualify for this type of loan. Lenders consider assets such as savings, investments, or retirement accounts and calculate a notional monthly income based on these assets.
Non-Qualified Mortgage with Expanded Debt-to-Income Ratios: While qualified mortgages have a maximum debt-to-income ratio of 43%, non-QM loans may allow higher ratios, sometimes up to 50% or more, allowing borrowers with higher debt levels to qualify.
Non-Qualified Jumbo Loans: These are non-QM loans that exceed the conforming loan limits set by Fannie Mae and Freddie Mac for conventional loans. They are typically larger loans that don't meet the qualified mortgage criteria.
Alternative Documentation Loans: Borrowers with non-traditional income sources or difficulty providing traditional documentation might opt for these loans. They might require alternative forms of income verification, such as letters from employers, rental income, or other non-standard documentation.
Fix-and-Flip Loans: Designed for real estate investors, these short-term loans provide funds to purchase and renovate properties for quick resale. They often come with higher interest rates and shorter terms.