When you’re in the market to buy a home, you’ll likely need to apply for a mortgage. There are numerous mortgage types available to you, including everything from conventional loans to government-backed loans. While conventional mortgages are more common than the other types, they also have stricter requirements that borrowers must meet. If you don’t have the necessary qualifications, you can get a mortgage by seeking a non-QM loan. In this article, you’ll find out what non-QM loans are and when you should apply for one.

What Are Non-QM Loans?

A non-qualified mortgage loan involves any type of mortgage that doesn’t follow the standards that the Consumer Financial Protection Bureau (CFPB) has put in place. CFPB maintains standards that financial institutions must follow if they want their loans to be qualified.

For example, when a lender offers a qualified mortgage, they must look at certain aspects of the borrower’s finances, such as their credit score and income. No-income loans and low-credit mortgages are two types of non-QM loans.

Because non-QM loans don’t need to follow specific guidelines, they can have highly varied terms. In most cases, these loans come with more manageable credit and income requirements. Borrowers may be able to show tax returns and bank account statements instead of paystubs and W2 forms.

How Do These Loans Differ from Traditional Ones

A qualified mortgage is any loan that follows CFPB guidelines. These are the minimum requirements that borrowers must meet to be approved for the loan. The CFPB places restrictions on interest-only payments, balloon payments, negative amortization, and other features that can appear in non-QM loans. The terms for a non-QM loan can’t be longer than 30 years.

Non-QM loans are designed to be provided to borrowers who may not meet the requirements that are part of a qualified mortgage. For example, self-employed borrowers who don’t receive income directly from an employer would be unable to provide lenders with W2s, which is why they may need to apply for non-QM loans. High debt and major credit issues are a couple of other reasons why borrowers seek non-QM loans.

While qualified loans verify income with W2 forms and paystubs, non-QM loans are approved based on 1099s, bank statements, and tax returns. If you’re self-employed, two years of tax returns and six months of bank statements may be enough for you to gain approval.

Non-QM loans also come with higher debt limits. The max debt-to-income ratio for qualified mortgages is usually 43%. In comparison, non-QM loans can be approved even when this ratio is above 50%. The debt-to-income ratio is the percentage of your monthly income that you use for debt payments.

If you’ve had to file for bankruptcy over the past few years, there’s a good chance that you haven’t been approved for a QM loan. Lenders typically believe that borrowers with a bankruptcy in their history are too risky to lend to.

If you have solid financials, you could be approved for a non-QM loan after filing for bankruptcy. There’s no waiting period. The same is true if you go through a foreclosure. After bankruptcy, people need to wait for anywhere from one to four years before they can apply for a qualified mortgage. The waiting period is two to seven years if your home is foreclosed on.

While non-QM loans have a lot of benefits, they also come with higher down payment requirements. When you apply for a qualified mortgage, lenders may accept a down payment of 3%-5%. If the down payment is below 20%, you’ll need to pay for private mortgage insurance. However, the loan can still be approved. With a non-QM loan, lenders often have a minimum down payment requirement of 15%-20%, which reduces their risk.

You may be tasked with paying higher interest rates if you’re approved for a non-QM loan, which means that you’ll pay more money over the life of the mortgage. The average interest rate for a conventional 30-year mortgage is around 7.5%. Interest rates for non-QM loans can vary considerably. You can expect to pay an interest rate of 8%-12%.

Who Should Apply for a Non-QM Loan?

If you’re a self-employed borrower, you may receive irregular payments or have multiple streams of income. In this scenario, it will be difficult for you to be approved for a qualified mortgage. You can use your bank statements to prove your income.

These loans are also beneficial for borrowers who have a previous bankruptcy, distressed sale, or low credit on their record. While you could wait to improve these issues, you’re likely a good candidate for a non-QM loan now.

Even if you have great credit, you may benefit from the interest-only payments that some non-QM loans have. The same is true if you have a debt-to-income ratio that’s higher than 43%. Some borrowers with great credit and considerable assets will still choose a non-QM loan because it helps them build a positive cash flow. It’s a good alternative to purchasing a home with cash.

Non-QM Requirements

To be approved for a non-QM loan, you’ll likely need to meet the following requirements:

• At least 12 months of bank statements
• Two years of tax returns
• Some loans require a minimum credit score of 620
• Maximum debt-to-income ratio of 50-55%
• Down payment of 15%-25% with a 620 credit score, 10% with a 720 credit score

Benefits of Non-QM Loans

There are many advantages associated with non-QM loans, the primary of which include the following:

• The maximum loan amount can reach $2.5 million, which is much higher than the $1.15 million limit of conventional loans
• Alternative income verification is allowed
• Suitable for self-employed individuals
• Investment properties and vacation homes may qualify
• Cash-out max is around $500,000
• Numerous loan options, including DSCR Loans, Hard Money Loans, and Ground-Up Loans
• You can deduct interest payments on non-QM mortgages

If you want to buy a second home or add an investment property to your portfolio, look no further than non-QM loans. These loans have looser requirements and are available to borrowers who don’t qualify for qualified mortgages. If you want to learn more about non-QM loans and their requirements, contact us today to speak with an expert.