What is a Non-QM Mortgage?
Buying a home can be an experience. There’s a lot of hindrances of finding a perfect home that suits your needs and you budget. While there may be traditional mortgages being offered, a non-qualified mortgage offers you an advantage. In this article, we’ll help you understand what non-qualified mortgage is, how this kind of mortgage works, and of course if a non-qualified mortgage is the right choice for you.
Non-Qualified Mortgage
A non-qualified mortgage (non-QM) is a loan option to help home-buyers wanting to apply but can’t meet the requirements of a traditional or qualifying mortgage. There are many reasons why a home-buyer can’t qualify. One example is if you are self-employed or you lack proper documentation to qualify for a traditional mortgage. If you think you fall under circumstances, a non-qualified program might be for you.
In order to be familiar with how non-qualified mortgage works, you must know the criteria of a traditional mortgage. Below are the most important ones:
Income: You have to have an income that can be verified such as W-2s and tax returns.
Loan Term: Loan term must be 30 years or less.
Debt-To-Income Ratio: There must be at least 43% or less DTI that goes toward any existing debt that you have.
Free of risky loan features: Risky loan features, or those that offer artificially low monthly loan repayments in the early years of the loan term, negative amortization and other features that may risk your ability to pay your loan.
These are some of the criteria of a traditional loan. If you think that you can meet any of these qualifications, then a non-qualifying mortgage may work for you.
Pros and Cons of a Non-Qualifying Mortgage Loans
One of the major pros of a non-qualifying loan is that they are open to cater borrowers who can't qualify for a traditional loan. Non-QM loans also require lesser documentation than other loans. Most Non-QM lenders do not typically require verifications like Tax-returns, pay stubs and W-2s. Payment can be flexible and can include balloon payment options that doesn't come often with a traditional loan. On the downside, Non-QM loans come with higher interest rates and large upfront fees.
Pros:
Lower credit scores allowed
Higher DTIs allowed
Allow non-salaried and other unconventional workers to buy or refinance a home
Flexible terms, including interest-only options
More forms of documentation accepted
Cons
Higher interest rates
Not readily available
Often come with high costs and fees
In a nutshell
The primary risk of a Non-QM mortgage is not being able to pay back the loan should your financial circumstances drastically change. This is particularly of concern if there is another economic recession. However, defaulting on any loan is always a risk.
However, by maintaining reasonable lending standards while preserving flexibility, Non-QM loans offer a middle ground for borrowers who would otherwise have no options or be saddled with unreasonably high-interest rates that drastically increase the expense of the loan.
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