What are non-QM loans?
If your income or credit history falls outside the stringent guidelines set by standard mortgage loan programs, a non-QM loan may be worth considering. Non-QM is short for non-qualified mortgage, and understanding how non-QM loans work may help you decide if they’re a worthwhile financing option for you.
Real Estate Terms
Non-QM Loans
Non-QM loans are mortgages that don’t meet the Consumer Financial Protection Bureau’s (CFPB) requirements to be considered qualified mortgages. A qualified mortgage meets the CFPB’s “ability to repay” rule, which requires that lenders vet your finances and set terms on the loan that you’re likely to be able to pay back.
Some features of non-QM loans include:
Risky features. To help you qualify for a non-QM, loan the lender may include one or a combination of the following features:
- Interest-only payments. Lenders that offer an interest-only option don’t require you to pay any of your loan balance down but instead just pay the interest accruing each month.
- Negative amortization. Although this is very rare, you may come across a lender that allows you to make payments for less than the interest charged each month. In this case, your loan balance grows, called “negative amortization” in loan terms.
- Balloon payments. You’ll make a larger-than-usual payment at the end of a set time if your non-QM loan has a balloon payment.
- Longer loan term. You may find a non-QM lender that offers terms longer than 30 years.
Higher-priced loans with upfront points and fees. To offset the higher risk lenders take making non-QM loans, you’ll likely pay higher rates, APRs and even upfront fees and points that aren’t permitted on qualified mortgages.
Flexibility with your income or credit history. While a standard QM loan requires you to verify your income with tax returns, W2s and paystubs, a non-QM lender might be able to use your bank statements to calculate income to qualify for your loan. Non-QM lenders often offer programs that allow you to borrow within days of a major recent credit event like a bankruptcy or foreclosure. You won’t have to wait the two to seven years required by qualified mortgage loan programs.
