Non-Qualifying (Non-QM) Loans and Mortgages
What You Should Know
- Non-QM loans provide flexible qualifications and unique features.
- You can make interest-only payments and extend your term length.
- However, they come with higher interest rates and fees.
- Shop around and compare offers to find the best loan for you.
Non-QM loans offer simpler lending criteria and frequently have unique features. They are known as non-qualifying mortgages (QM) because they don't meet the qualifications established by the Consumer Financial Protection Bureau (CFPB). They are the opposite of qualified mortgages, which are regulated by the CFPB.
Most Americans select non-QM loans for flexible documentation requirements, higher debt-to-income ratio limits, and the ability to make interest-only payments. This guide will further explain non-QM loans and the different features available. It will also provide a list of the top US non-QM lenders. Continue reading to learn everything you need.
What Is a Non-QM Loan
The CFPB doesn't regulate non-QM loans. They are designed for people who can't qualify for conventional mortgages or prefer unique features such as a balloon payment. The CFPB introduced the QM rule in 2013 to respond to the subprime mortgage crisis. The rule established guidelines that limited the number of loans lenders could offer.
The CFPB's goal was to protect consumers from taking on loans they couldn't afford. To qualify for a QM loan, borrowers had to meet specific criteria, such as a maximum debt-to-income ratio of 43%. However, the rule also made it more difficult for some people to qualify for a mortgage.
Non-QM loans were created as an alternative for these borrowers. Lenders can offer non-QM loans with more flexible terms and features. For example, some non-QM loans allow for a higher debt-to-income ratio, or alternative income documentation. Some characteristics of Non-QM loans include:
Top Reasons For Selecting a Non-QM Mortgage
CoreLogic, Q1-2022
Source: Corelogic, 2022
*The sum of percentages exceeds 100% because borrowers can apply for multiple features
1. Unique Features
Non-QM loans often have unique features designed to help certain circumstances. These features are usually deemed risky by traditional lenders and aren't offered. These features include:
- Longer Term Length: Non-QM loans often have longer lengths than QM loans. This allows borrowers to reduce their monthly mortgage payments and decrease their debt-to-income ratio.
- Balloon Payments: These have low, or no monthly payments. At the end of your term, you will need to make a lump-sum payment of the principal and interest. Balloon mortgages are often used during flipping projects to repay the loan when you sell the property.
- Negative Amortization: This allows you to make payments lower than your prescribed monthly amount. The unpaid interest is added to the loan balance, and your mortgage term will extend.
- Interest Only: Interest-only loans allow you to make payments only on interest for a certain period. This lowers your monthly payments but increases the amount of interest you'll pay over the life of the loan. You will need to pay back the principal at the end of your term.
2. Flexible Qualification
- Flexible Documentation: Non-QM loans offer more flexible documentation requirements than QM loans. For example, you may be able to qualify with alternative income documentation such as bank statements or asset depletion.
- Higher Debt-to-Income Ratio: Non-QM loans often have a higher debt-to-income ratio limit than QM loans. This allows you to qualify for a larger loan amount.
3. Higher Fees & APRs
Non-QM loans typically have higher fees and APRs than QM loans. This is because they are considered to be a higher risk for lenders.
Non-QM vs. QM Loan
| Non-Qualified Mortgage (Non-QM) | Qualified Mortgage (QM) | |
|---|---|---|
| Interest rate & fees | Higher | Lower |
| Qualification | Flexible |
|
| Payment options |
|
|
| Term length options | Flexible | Below 30 years |
Types of Non-QM Loans
There are several types of non-QM loans available. Each type has different features and is designed for a specific situation. The most common types of non-QM loans are:
| Name | Description |
|---|---|
| No-doc/ Bank statement loans | These loans are designed for self-employed borrowers. You'll need to provide bank statements instead of traditional tax returns to prove your income. |
| Asset depletion loans | These loans are available if you don't have a regular income but have a large number of assets. Lenders will use your assets to qualify you for the loan. |
| DSCR loans | Allows you to qualify for rental property mortgage using the future income you will receive. |
| Non-warrantable condo loans | Some condos don't meet conforming loan guidelines. Many lenders avoid these properties because they can't sell the mortgage to Fannie Mae or Freddie Mac. |
| Negative amortization loans | These loans will automatically extend your mortgage term if your monthly payments are less than the interest you owe. The unpaid interest is added to the loan. |
| Reverse mortgage | This is a loan available to seniors 62 years or older. It allows you to borrow against your home equity by receiving monthly payments or a lump sum. You won't need to repay the mortgage until you move or sell the home. |
| Foreign national loans | These loans are available for borrowers who are not US citizens or permanent residents. You'll need to provide a valid passport or other forms of identification. |
| Non-prime loans | Non-prime loans are for borrowers with bad credit or limited credit history. These loans have higher interest rates and fees but may be an option if you can't qualify for a prime loan. |
| ITIN loans | ITIN loans are available for borrowers with an Individual Taxpayer Identification Number instead of a Social Security number. |
| Hard money loans | Hard money loans are private loans that are secured by real estate. They are often used during flipping projects to pay off the loan when you sell the property. |
| Blanket Mortgages | These allow you to bundle multiple properties into one mortgage. You’ll reduce closing costs and may negotiate a lower interest rate. However, there is higher borrower risk. |
| Fix and Flip Loans | A category of loans designed to help real estate investors with flipping property. |
Top Five Non-QM Mortgage Lenders
Top Five Non-QM Lending Volume
Scotsman Guide, 2021
Source: Scotsman Guide
Fairway Independent Mortgage Corp.
- Headquarters: Madison, WI
- Number of States: 50
- Years in Business: 26
Fairway Independent Mortgage Corp. is ranked the top mortgage lender by Scotsman Guide. Although Fairway is known for QM loans, they are popular for their non-QM options, such as their reverse mortgage.
Angel Oak Lending
- Headquarters: Atlanta, GA
- Number of States: 45
- Years in Business: 12
Angel Oak Lending is a specialized non-QM lender. They offer various non-QM options, such as a bank statement loan, DSCR loan, foreign mortgage, and more. All of their options are for underserved borrowers.
Guaranteed Rate
- Headquarters: Chicago, IL
- Number of States: 50
- Years in Business: 22
Guaranteed Rate is one of the largest mortgage lenders in the US. They offer a wide variety of loans, including non-QM options. Their most popular non-QM loan is their interest-only mortgage.
CoreVest Finance
- Headquarters: Irvine, CA
- Number of States: 48
- Years in Business: 8
CoreVest Finance is a direct lender specializing in lending to real estate investors. They offer a variety of non-QM products, such as fix and flip, bridge, and construction loans.
Acra Lending
- Headquarters: Lake Forest, CA
- Number of States: 39
- Years in Business: 19
Acra Lending is a dedicated portfolio lender owned by citadel servicing. Their non-QM programs include bank statements, DSCR, foreign national, interest only, and many more.
How to Qualify for a Non-QM Loan
To qualify for a non-QM loan, you'll need to meet the lender's eligibility requirements. Each lender has different guidelines, but standard requirements include:
- A minimum credit score
- Proof of income
- A minimum down payment
- Asset verification
- Employment verification
You may also need to provide additional documentation depending on the type of loan you're applying to. For example, if you're applying for an ITIN loan, you'll need to provide your passport or another form of identification. You'll need to provide proof of residency if you're applying for a foreign national loan.
The Bottom Line
Overall, non-QM loans offer several benefits, including more accessible qualification standards, a more comprehensive range of loan products, and flexible terms. However, these loans typically come with higher interest rates and fees. If you're considering a non-QM loan, compare offers from multiple lenders to find the best deal.