For anyone who has been through the mortgage process, the concept of qualifying for a traditional loan should be rather familiar. Mortgages, including non-qm loans, are regulated at both the state and federal levels and require a considerable degree of transparency and standardization.
The regulations that govern traditional qualified mortgages are meant to serve roughly the same function as the accredited investor rules. Lenders are not permitted to write loans for borrowers who do not meet certain basic criteria. Among these are the ability to repay. Determining this ability often has to do with income verification, evaluating creditworthiness and various other requirements.
When borrowers venture outside the traditional market, there are still loans to be found, but they may or may not resemble the familiar mortgages we’ve all encountered before. So what exactly is the difference between a qualified and a non-qualified mortgage?
Borrowers must have the documented ability to repay. Some loans may not have risky features like balloon payments or interest-only payments. There are caps on fees and borrowers must be devoting an approved percentage of their income to housing. These rules prevent defaults, which benefits both borrower and lender.
Some might contend, with considerable justification, that any loan that can’t be called a “qualified mortgage” is by definition sub-prime. Since many of these loans are made after traditional lenders deem the borrower too risky, the comparison isn’t necessarily off the mark. Ultimately, any loan that doesn’t meet the criteria for a qualified mortgage is, at the very least, a non-qualifying mortgage.
Borrowers in the “non-QM” category are evaluated with what lenders call “alternative criteria.” They are often unable to document their income or prove that a sustainable portion of their income is going towards their housing costs. This puts them at risk of overborrowing, but it also puts them in a position where they can’t work with a traditional lender, even if they do eventually repay what they borrow.