What are Non-QM Mortgages?

There are certain challenges to qualifying for a mortgage, especially if it’s difficult to prove your income or you’ve had to deal with credit problems in the past. Non-QM mortgages, or non-qualified mortgages, come with alternative loan requirements that make it possible for people with unconventional finances to get the mortgage they need. So, what are non-QM mortgages? If you’re self-employed, invest in real estate, carry a lot of debt, or have had a recent credit issue, a nonqualified mortgage might be right for you. It can open the door to homeownership for you.

Now, non-qualified mortgages also come with a few disadvantages. For starters, they may require a bit of legwork to find. They may also cost more in interest and fees. Even then, you can explore non-qualified mortgages as a plan B if you’re having trouble acquiring a mortgage due to income or credit requirements. Our experts at ALT Financial Network, Inc. explain everything you need to know about non-QM mortgages here.

What are Non-QM Mortgages?

A non-qualified mortgage bypasses some of the guidelines of a qualified mortgage (more about it later). Here are a few examples of terms and features you might find in a non-qualified mortgage:

• 40-Year Term: If you spread your payments out over 40 years, it can reduce your monthly payment. At the same time, the interest costs over the life of the loan will increase.
• Less Documentation Needed: You can use bank statements or even stated income instead of tax returns and pay stubs to verify your income.
• High Debt-to-Income (DTI) Ratio Allowed: You can still qualify if your monthly debt payments exceed 43% of your gross income.
• Jumbo Loans: A loan that exceeds the Fannie Mae and Freddie Mac limits for a single-family home is considered nonqualifying. Since last year, this limit has been $806,500 in most U.S. counties. However, it rose to $1,209,750 in designated “high-cost” counties.
• Recent Credit Event Loans: These mortgages are for folks locked out of traditional mortgages due to a recent foreclosure or bankruptcy.

What are Qualified Mortgages?

The next on the list is a qualified mortgage that follows specific guidelines, including:

• Consideration and verification of your income and debts
• No negative amortization, interest-only loans, or balloon payments
• Limited upfront points, fees, and annual percentage rate (APR)
• Loan term of no longer than 30 years

Qualified vs. Nonqualified Mortgages

The main difference between qualified and nonqualified mortgages is how closely they adhere to consumer protections enforced by the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB). These protections regulate interest rates and fees on home loans. They also need a mortgage broker in California to verify that a borrower has the ability to repay their loan. The objective is to discourage potential borrowers and lenders from overborrowing.

Who Should Choose a Nonqualified Mortgage?

Now that you have a general idea of “what are non-QM mortgages,” it’s time to find out who should consider these loans. If you need more than what you can get from a traditional mortgage, a non-qualified mortgage is the answer. The following scenarios highlight a few situations where a non-qualified mortgage can help you secure a loan:

• You’re self-employed, and your income is difficult to verify. This includes people who want to use side income as a means to qualify for a loan.
• You need a jumbo loan.
• You invest in real estate or own several properties and have multiple loans.
• You need to reduce your monthly interest payment by extending your mortgage to 40 years or getting an interest-only loan that won’t require you to pay down your balance.
• You have a relatively low income, yet enough resources. For example, you recently sold your business and retired.
• You recently declared bankruptcy, but have recovered and are on track financially.
• Your DTI is high, but you also have a strong strategy for managing your monthly debt.

The good news is that you may have options even if you’re having difficulty qualifying for the mortgage you need. The housing market has already witnessed rising home prices and rising interest rates. In such a situation, it isn’t uncommon to want just a little more loan than you anticipated. A non-qualified mortgage may get you a bit more flexibility now. If your situation gets better, you may be able to refinance and get better terms later.

Where to Get a Nonqualified Mortgage?

You can get a non-qualified mortgage through a bank, credit union, or a mortgage lender in California. Some types of nonqualified mortgages, such as jumbo loans, are easier to find than others.

It’s best to start by talking to your bank or credit union to see if they offer a loan befitting your situation. If you’ve worked with them a long time or have high account balances, you can benefit from relationship banking offers.

Alternatively, you may consider working with a mortgage broker from ALT Financial to help you pinpoint challenges and suggest alternatives. There are a few online lenders who offer non-qualified loan options, too.

Should You Get a Nonqualified Mortgage?

Nonqualified mortgages are suitable for borrowers with enough income and assets to cover a mortgage. Others with income that’s difficult to document, high debt, or recent credit issues may cause them to look riskier to lenders than they actually are. If you can afford the extra dollars in fees or interest, a non-qualified mortgage may help you secure the loan you need.

Keep the following things in mind before you make the jump:

• Make Sure You Can Afford It: A nonqualified mortgage won’t be of much use if you end up getting an unaffordable mortgage. If your source of income is unreliable or your debt load is too high, you may have trouble making monthly mortgage payments. A higher interest rate will result in higher costs over the life of the loan. Before you sign the agreement, make sure it’s a loan you can live with.
• Shop Skeptically: Get as many options as you can and compare them. Take a close look at the loan’s interest rate, closing costs, terms, and conditions for several loans and choose the most affordable option.
• Consider All Alternatives: Consider scaling down your home purchase to make your loan more affordable. Also, wait to purchase a home to give your credit time to recover, to see if home prices or interest rates moderate, or to allow time to save more money for a down payment and reduce the size of the mortgage you’ll need.

Closing Thoughts

What are non-QM mortgages? They can help unconventional buyers get loan approval. But even a non-qualified mortgage has a dedicated set of requirements. You’ll still need to showcase your ability to repay the loan and make timely payments over the long haul. If a nonqualified mortgage is what it takes to get you into a home on your own terms, it’s a benefit. If it looks like it might stretch you beyond your own limits, you may be better off looking for other options.

Whether you opt for a non-qualified or traditional mortgage, our mortgage broker in California from ALT Financial Network, Inc. can help with both.

FAQs

1. Do non-QM mortgages require a larger down payment?

Non-QM mortgages often require higher down payments than traditional loans, depending on risk factors like credit history, income type, and loan size, but requirements vary by lender and program.

2. Can non-QM mortgages be refinanced later into a qualified mortgage?

Yes, many borrowers refinance non-QM mortgages into qualified mortgages once income, credit, or debt ratios improve, potentially lowering interest rates and monthly payments over time.

3. Are non-QM mortgages available for primary residences only?

No, non-QM mortgages can be used for primary homes, second homes, and investment properties, making them popular among real estate investors and borrowers with multiple properties.

4. Do non-QM mortgages have prepayment penalties?

Some non-QM mortgages may include prepayment penalties, especially on investment loans, though terms vary widely and many lenders now offer options without early payoff restrictions.

5. How long does it take to get approved for a non-QM mortgage?

Approval timelines for non-QM mortgages are often similar to traditional loans, but additional documentation review may extend processing time depending on income verification methods and lender requirements.