Understanding Non-Qualified Mortgage (Non-QM) Loans
Many homebuyers lack the standard or consistent forms of income typically required by mortgage lenders. Although these buyers may not qualify for conventional loans, they often have sufficient income or assets to afford homeownership. In such cases, a non-qualified mortgage (non-QM) can be the solution.
What is a Non-QM Loan?
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Following the 2008 mortgage crisis, federal regulators tightened borrower requirements for loans backed by government agencies, resulting in "qualified mortgages." Loans that do not meet these criteria are known as "non-qualified mortgages" or non-QM loans.
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Non-QM loans use alternative methods to verify income. Despite not meeting standard requirements, these loans are not necessarily riskier; borrowers must still prove their ability to repay. Due to the additional work required to process them, non-QM loans typically have interest rates 0.5% to 5% higher than conventional loans.
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Who Benefits from Non-QM Loans?
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Non-QM loans are ideal for borrowers with unique income situations, such as:
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Self-Employed Borrowers: Those with irregular income from multiple sources can qualify using bank statements instead of tax returns.
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Borrowers with Considerable Assets: Individuals who prefer to finance their home purchase to maintain cash flow can benefit from non-QM loans.
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Real Estate Investors: Those who buy homes to flip or rent often use non-QM loans due to the quick turnaround and qualifying income from projected rent.
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Foreign Buyers: Non-US citizens with high income, substantial assets, and down payments can obtain non-QM loans despite lacking a US credit score.
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Buyers with Blemished Credit Histories: Those with sufficient income but credit issues such as prior bankruptcies or foreclosures can still qualify.
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Benefits of Non-QM Loans
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Provide mortgage funding for non-traditional income or financial situations.
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Allow loans up to $2.5 million.
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Offer both fixed-rate and adjustable-rate options.
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Close as quickly as conventional mortgages.
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Can be made to legal entities, like family trusts.
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Do not require mortgage insurance.
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Can free up cash for investments.
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Allow for cash-out refinance loans up to $500,000 in equity.
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Documentation Required for Non-QM Loans
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Documentation varies based on the applicant's financial situation. Income verification can include personal and business tax returns, bank statements, or investment account statements. In some cases, income verification is not necessary. Credit scores and debt-to-income ratios are also considered. Non-QM loans take a holistic approach to assessing an applicant's financial situation rather than relying solely on a standard underwriting matrix.
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Types of Non-QM Loans
Non-QM loans use non-standard mortgage terms to help borrowers qualify. These terms can include loan durations longer than 30 years, interest-only loans, higher debt ratios, or alternative income verification methods. Non-QM loans can be used for:
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Primary residence mortgages
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Refinance loans
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Cash-out refinances
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Investment property loans
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For more information or to explore how a Non-QM loan can meet your unique financial needs, contact us today.