Non-qualified mortgage loans, loans that don’t meet the standard criteria for qualified mortgages, are becoming more popular. Many potential home buyers do not conform to the standard workweek and paycheck and thus appear risker to traditional lenders. Non-QM loans allow for greater flexibility in determining which borrowers are worth the risk.
Who uses a non-QM loan?
1. The self-employed.
People who work for themselves or are part of the gig economy may not have regular paychecks. Some entrepreneurs go through seasons when money is regular and seasons where things are kind of dry. Others have multiple income streams that, together, paint a complete picture of their ability to repay a loan.
Non-QM borrowers can often use their cash flow and liquid assets to prove their ability to repay. Bank statement loans, widespread among the self-employed, are based on the average cash flow for a period of time rather than W2d and pay stubs.
2. Real estate investors.
Those who follow the steps of their favorite real estate reality television shows often need funding quickly. They plan on fixing and then flipping a property to make a profit. Those who invest in these properties don’t always need to show the ability to repay since they plan on selling the house as soon as they can. In other cases, rental income will be used to pay back the loan.
3. Foreign Nationals.
Non-residents may not have been in the U.S. long enough to create a standard credit score. A non-existent or low credit score is almost certainly a deal-breaker for qualified loans. Instead, foreign nationals can use international credit reports and letters from creditors to help establish credit. These individuals may also use large down payments, substantial liquid assets, or additional collateral to obtain a non-QM.
Borrowers who are interested in riskier loans, even if they have good credit, might opt for a non-qm. They may want interest-only payments or terms greater than 30 years. Those with poor credit might also find non-qms easier to obtain. They might discover tighter standards in other areas of their application.
While non-qm mortgage lenders have more flexibility, they don’t just hand out loans to anyone. Income still needs to be verified, and other factors need to compensate factors that disqualify you for a qualified mortgage.
For example, a low debt ration means a lower default risk. If you don’t put large portions of your income towards debt, you have more income available for your mortgage. A high credit score shows lenders that you are good with your finances.
Ultimately, a non-qm has features that make it seem riskier than a qualified loan. This doesn’t mean that the loan is bad; just different.
– Interest-only loans
Wealthy investors and house-flippers typically look to move fast. These quick flips mean they aren’t as interested in paying down the principal. An interest-only loan creates more cash flow for the flip.
– Stated income loans
These aren’t the same as the stated income loans of the past. Borrowers still need to prove their income, but do so via other methods.
– Verified assets
Even if a borrower doesn’t have significant income, he or she may have enough assets to cover mortgage payments. The lender doesn’t directly verify income but will verify assets.