If you have a less than perfect credit score or are self-employed with alternative income, you won’t qualify for a traditional home loan. However, you don’t have to rent forever.
There is another option. It is called a non-QM loan or non-qualifying mortgage. This article will go over what a QM or a qualifying mortgage is and QM versus non-QM loans, where to find non-QM loans, and who might benefit from one.
Key takeaways
- Non-qualifying mortgages are for people with unique income situations.
- Non-QM loan requirements vary among providers and use non-traditional income verification methods.
- Borrowers who benefit include self-employed, high debt-to-income, lower credit scores, and retired individuals.
- Advantages: lower credit score requirements, alternative income verification, not-so-difficult application process; Disadvantages: higher rates, fees, down payments, and difficult to find a lender.
- Non-qualified mortgage loans are offered by credit unions, bad credit mortgage lenders, and private mortgage lenders.
What is a non-qualifying loan?
A traditional, qualified mortgage meets requirements laid out by the Frank-Dodd Act put into place after the housing market crisis of 2008 and standards set by the Consumer Protection Act. Some of these standards include having a debt ratio lower than 43%, verification of income, and a loan term of 30 years or lower, among others. The purpose of a QM loan is to prevent another housing crisis, which is why these loans have such stringent requirements.
However, a non-qualifying mortgage, also called a non-QM loan, doesn’t have to meet a qualified loan’s standards. Non-QM mortgages use non-traditional verifying income methods to provide home loans to those with unique income circumstances or situations. The main differences between a QM loan and a non-QM loan are the requirements.
Requirements for a non-qualifying loan
Since non-qualifying loans are not backed by any government entity such as Fannie Mae, FHA, or VA, the requirements are not standardized. This means that each loan provider can set its own standards for verifying your income and ability to repay the loan.
For instance, if someone is self-employed, the lender can’t call your employer as a QM loan officer would. When this happens, the mortgage lender might ask for five years of bank statements to prove income.
You could still see some traditional loan elements, such as a minimum credit score requirement, proof of income, and debt ratio requirements. However, any requirements with a non-qualifying loan will be met in ways that a qualifying loan would not allow.
Type of borrowers that would benefit from a non-QM loan
A non-QM loan would help any buyer with income to make regular payments but does not meet a qualifying loan’s requirements.
A great example would be if you owned your own successful business. You receive income, but it is not regular on a set schedule. Some months you might have double your ordinary income, but other months, you might have had a bad month and have less income.
Even though you might be able to afford a loan payment every month, you would not be able to meet the income verification requirement of a qualifying loan. In this scenario, a non-qualified mortgage loan would be of great benefit.
Other borrowers that would benefit from a non-qualified mortgage loan include:
- Retirees
- Buyers with high debt-to-income ratios
- Buyers with a lower credit score
- Foreign nationals
- Those who live off of investments, such as a real estate investor
- Buyers with high assets but low income
- Medical professionals
- Prime or non-prime borrowers
Advantages and disadvantages of non-QM loans
Like every loan, there are advantages and disadvantages of non-QM loans. Let’s take a look at a few of these.
Pros
- Lower credit score requirements enable buyers with less than perfect credit scores to qualify
- The application process is not any more difficult than a traditional mortgage
- Income verification is less specific, allowing for alternative forms of verification.
Cons
- Non-QM loans can be harder to find as fewer institutions offer them.
- Interest rates and fees can be higher.
- Non-QM loans can have higher down payments.
Do you need a non-qualifying mortgage?
If you don’t meet certain criteria, you may need a nonQM. If you’ve tried to obtain a traditional loan for a home and been denied because your income is sporadic or your DTI is too high, ask the lender if they offer non-qualifying mortgage loans. Not all lenders offer nonQM loans, so you may need to shop around.
Who offers a non-qualified mortgage loan?
Even though non-qualified mortgages are offered at fewer institutions than traditional mortgage loans, there are still several options that allow you to shop around for a good lender.
- Credit unions: You don’t usually have to be a credit union member to take out a loan. However, you might have to meet additional qualifications like living, working, or attend a house of worship within a certain radius of the credit union. Credit unions have the benefit of typically having lower interest rates, though their credit score requirements can be higher than other mortgage lenders.
- Bad credit mortgage lenders: Some lenders work specifically with those who have lower credit scores. These lenders will have lower credit score requirements but sometimes higher interest rates. However, they are a good option if you have a less-than-average credit score.
- Private mortgage lenders: Several private mortgage lenders offer non-QM loans, each with its own requirements. A simple Google search can find you several different options to find one that you meet the requirements for.
Non-QM loans are perfect for those who want to buy their first home, second home, or even an investment property but don’t meet a QM loan’s strict requirements. Though there are some downsides, the pros outweigh the cons, making a non-qualified mortgage loan a viable option for those with alternative incomes.
Contact us today
If you are ready to purchase a home and think that a non-qualifying mortgage is a good option for you, reach out to the experts at Hero Home Programs™ by requesting a consultation online. Their partnership with local vendors and national lenders makes finding your home buying partners easier than ever before.
