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About Non QM Loans
While you are seeking a home loan but unable to meet the strict requirements by the lender then, a non-qualified mortgage (non QM loans), could be your answer.
Here, let us see what are non-qualified mortgages who can seek them, and whether if they’re a safe option.
What is a Non-Qualified Mortgage Loans (Non QM Loans)?
A home loan designed to help homebuyers who can’t meet the strict criteria of a qualifying mortgage is called a non-qualified mortgage (non QM loans).
For instance, you might need to look at non-qualified mortgages if you are self-employed or not having all the necessary documentation to qualify for a traditional mortgage.
The ideal way to understand a non-qualifying mortgage is to look at the criteria for traditional, qualifying mortgages.
To qualify for a traditional mortgage, you must meet certain requirements like:
- Verifiable Income: You must have pay stubs, W-2s, and tax returns.
- Low Debt: Your debt to income ratio (DTI), which is the amount of your monthly income that goes toward your existing debts should be 43% or less.
- Limits on fees: Points and fees on your loan need to be within 3% of the loan amount.
- No risk loan features: Risky features are interest-only loans (when you are only paying interest without reducing the principal), negative amortization -where the principal can increase, even while you are making payments, or balloon payments whereby the end of the loan a larger payment can be tacked.
- Your loan term: The loan term must be 30 years or less.
If you do not meet the requirements of all of the above boxes, you’ll need to opt for non-qualifying mortgages.
You need to prove to the mortgage lenders that you have the ability to repay your loan. Buyers are also protected from risky loans with the above regulations.
For qualifying for mortgages these minimum standards are part of the 2010 Consumer Protection Act and Dodd-Frank Wall Street Reform Act.
During the great recession in 2008 lenders seemed willing to approve mortgages for anyone, including those with poor credit and low down payments, where some mortgages did not verify income at all.
Homebuyers were lured into mortgages that were unaffordable by unethical lenders.
These fraudulent practices were one of the reasons the recession hit with such severity. Millions of borrowers having home loans could not afford the payments, resulting in the economy crashing and adding to the recession.
When lenders follow the lending guidelines strictly, they are protected from liability. Borrowers cannot complain saying that the lender knew they could not make the monthly payments (as it happened during the Great Recession).
Government agencies like FHA, VA, Fannie Mae, and Freddie Mac do not back Non-qualified mortgages.
Advantages and disadvantages of non QM loans
When choosing a mortgage there are various factors that you need to consider. Let us quickly go through the advantages and disadvantages related to a non QM.
Advantages of a non qm loans
- A non-QM loan enables borrowers to qualify for a mortgage even when they have a low credit score
- The requirement of income documentation with a non-QM loan is less stringent.
- The application process of a non-QM loan is very similar to the qualifying mortgages.
Disadvantages of non qm loans
- For a non-QM loan, the interest rate and fees may be higher.
- It is difficult to find non-QM lean lenders
- The non-QM loans cannot be sold to Fannie Mae or Freddie Mac
Should I get a non-qualified mortgage?
When you have the income to make regular, on-time mortgage payments, but cannot get a qualifying mortgage then a non-QM is a good option.
For instance, if you don’t have trouble paying your bills, your credit score is good, and you have reserve funds in the bank but because you own a contracting business, your income some months, is high and sometimes only a little goes into your bank account.
And you cannot predict exactly how much you will earn from year to year. Then, you cannot tick the “income verification” box required for a qualified mortgage even if your finances are healthy. That’s when a non-QM is beneficial.
A non-QM loan is ideal for borrowers like
- Retirees
- Self-employed home buyer
- A real estate investor
- Entrepreneur
- Foreign national
- A buyer who depend on investments, or having high assets and low income
- A high debt-to-income ratio buyer
- A buyer with less-than-perfect credit
Non-QMs show that mortgages are open to many types of homebuyers.
Whether your credits are bad, or your income is low, or if you have a high DTI you can still get a mortgage with a non-QM loan.
How to find a non-qualified mortgage?
- Credit unions: even if you can’t qualify for a traditional loan a great mortgage loan is as close to you as your nearest credit union. Non-qualified mortgages are issued at credit unions. If you’re a member-owner rather than just a customer, then a credit union may be more willing to work with you even if you don’t tick all the normal boxes. As long as you qualify to join. s: some credit unions cater to tradespeople only, while others serve only specific communities, but a host of benefits awaits with credit union offers.
- Mortgage lender for bad credit: If you are lagging in your credit score, there are mortgage lenders who routinely work with people with lower credit scores (at least 500 plus). Compared to a qualifying mortgage you would be paying more in interest and fees, but it opens the door of homeownership for you.
If not a non-qualified mortgage then what?
Before you give up on buying a home because your credit score is low or your income is difficult to prove, there are other options.
You can consider looking for a home that the current owners are willing to finance if the situation is preventing you from obtaining a qualifying mortgage and will take a few years to pass.
So how does it works? with the owner on certain terms, like how long the owner will act as a lender and what is the interest rate you will pay? etc.
With this contract, you make a down payment, but instead of making monthly payments to a mortgage lender, you pay the previous owners.
And if you default on the loan then the previous owner can repossess your home just like a financial institution would.
An owner’s finance arrangement also at times is risky. It usually includes a “balloon payment,” that needs to be paid off in three to five years.
In such a situation, you can apply for a traditional mortgage and redirect the funds to pay the previous owner in full.
Then you make your monthly payments to the new lender after the previous owner is out of the picture.
Rate-shop for the current mortgage rates to find the perfect mortgage for you if you’re looking for a non-QM loan.
You can save thousands of dollars over time when you take the time to find the right loan.
Conclusion
One of the primary benefits of a non-QM loan is that buyers are allowed to purchase a home even with low credit scores.
People who are self-employed, run their own businesses, or work non-traditional jobs require less proof of income with a non-QM loan.
Applying for a Non-QM loan is almost as easy as it is with a traditional loan. If you’re worried whether a non-QM is safe, you will be relaxed to know that they are not the same as subprime mortgages.
Because of the Great Recession housing meltdown, there has been a misconception about non-QMs being a bad loan. But just like qualified mortgages, non-QMs too have their own set of guidelines.
Actually, the lending process is quite similar, minus the requirement of the loan documents.
Both qualified and non-qualified loans are subject to the “Ability to Repay Rule.” Like any other mortgage on the market, a non-QM is safe.
