Non-QM Mortgages: What They Are and Who Should Use Them

Key Takeaways About Non-QM Mortgages

Need quick answers in your journey to finding the perfect home loan? Here’s a quick breakdown of the key facts you need about non-qualified (Non-QM) mortgages.

Non-QM means non-qualified, which generally means the loan falls outside the bounds of traditional, government-backed loans.
Non-QM loans are great for people with freelance, contractor, or sporadic income.
Qualifying for a Non-QM loan follows the same general mortgage process, with a few variables for income verification.

What Is a Non-QM Loan?

Traditionally, qualifying for a mortgage requires a specific set of criteria, including a strong credit score and verifiable income through W-2s. But what happens if your income structure doesn’t fit the mold? This is where non-QM loans, or non-qualified mortgages, come in.

Non-QM loans are designed for borrowers with non-traditional income sources, like freelancers, self-employed individuals, or those with investment income. These loans offer more flexibility in how they assess your ability to repay the loan. Instead of relying solely on W-2s, lenders may consider bank statements, tax returns, or asset documentation to verify your income potential.

This flexibility can be a game-changer for those who wouldn’t qualify for a conventional mortgage. However, it’s important to remember that non-QM loans often come with higher interest rates and stricter terms compared to traditional mortgages.

If you’re unsure whether a non-QM loan is right for you, don’t hesitate to connect with a mortgage professional who can assess your unique financial situation and guide you toward the most suitable loan option.

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Loan Programs Available For Non-QM Borrowers

Not all borrowers fit into a neat box with a 9-to-5 job and W-2s. The beauty of non-QM loans is their variety, catering to specific financial situations. A qualified mortgage professional can help you explore the different non-QM loan options available and determine which one best suits your unique financial situation and goals. Here are three of the most common non-qualified mortgage types.

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Bank Statement Loans

Ideal for self-employed individuals, freelancers, and commission earners who may not have traditional pay stubs. These loans rely on bank statements, typically 12-24 months’ worth, to verify income and demonstrate your ability to repay the loan.

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Loans for Self-Employed Borrowers

Designed specifically for the unique income structures of self-employed individuals. Lenders may consider your tax returns, business financials, and bank statements to assess your income potential. Some lenders may even average out your income over a few years to account for income fluctuations.

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Asset Depletion Loans

This option allows you to leverage the equity in your existing assets, like stocks, bonds, or even another property, to secure a down payment for your new home. The loan itself is based on your traditional income and future earning potential. Keep in mind, that this strategy can impact your overall investment portfolio diversification.

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How Does a Non-Qualified Loan Differ from a Qualified Mortgage?

Imagine you’re applying for a mortgage. Traditional lenders rely heavily on a standardized set of criteria established by the Consumer Financial Protection Bureau (CFPB) to assess your eligibility. These criteria, often referred to as “QM” (Qualified Mortgage) requirements, focus heavily on income verification through W-2s and a strong credit score.

This approach works well for salaried employees with a consistent income history. However, it can leave out a significant portion of the population – freelancers, self-employed individuals, commission-earners, and real estate investors. This is where non-QM loans come in.

Here’s a breakdown of the key differences between non-QM loans and qualified mortgages:

Income Verification: QM loans rely primarily on W-2s to verify income. Non-QM loans, however, offer more flexibility. Lenders may consider bank statements, tax returns, or asset documentation to paint a more holistic picture of your financial situation.
Credit Score Requirements: While credit score is still important for non-QM loans, lenders may have more flexibility in certain situations. For example, a borrower with a slightly lower credit score but strong business income from self-employment might still qualify for a non-QM loan.
Down Payment: Down payment requirements can vary for both loan types. However, some non-QM loans may allow for a lower down payment compared to traditional mortgages.
Interest Rates: Since non-QM loans involve more complex underwriting and cater to borrowers deemed slightly riskier by traditional standards, they often come with higher interest rates than qualified mortgages.
Loan Terms: Non-QM loans may have stricter terms compared to QM loans, such as shorter loan durations or higher closing costs.

Choosing Between Non-QM and Traditional Mortgages:

The decision between a non-QM loan and a traditional mortgage depends on your individual circumstances. If you have a strong credit score, consistent W-2 income, and a sizeable down payment, a qualified mortgage might be the more affordable option. However, if your income is non-traditional or you have a lower credit score due to past circumstances but have a solid track record of managing your finances, a non-QM loan could be the key to unlocking homeownership.

It’s important to consult with a mortgage professional who understands non-QM loan options. They can assess your unique financial situation and recommend the loan product that best suits your needs and financial goals.

We’ve Helped People Qualify for Non-QM Loans for Over 30 Years

The Abo Capital Team specializes in nontraditional borrowers, helping them navigate the mortgage process and find the right program for their income and goals. Whether you’re a small business owner, freelancer, gig worker, or contractor, there are ways to strategize your mortgage without the traditional W2 income.

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Who Can Qualify for a Non-QM Loan?

Traditionally, mortgages favored applicants with a steady paycheck and a 9-to-5 job. But what if your income looks different? The good news is, that non-QM loans are designed to help a wider range of borrowers achieve homeownership. Here’s who can potentially benefit from a non-QM loan:

Freelancers and Self-Employed Individuals: If your income comes from freelance gigs, consulting work, or running your own business, non-QM loans can be a great option. Lenders will consider your bank statements, tax returns, and business financials to assess your income potential.
Commission-Based Earners: Do your earnings fluctuate based on commissions? Non-QM loans can account for the variable nature of your income by looking at your average earnings over a specific period.
Real Estate Investors: Looking to expand your investment portfolio? Non-QM loans can be used to finance rental properties, even if your traditional income doesn’t meet standard mortgage requirements.
Individuals with Recent Credit Events: Has a past credit hiccup impacted your score? Non-QM loans may be more flexible when considering credit history, especially if your overall financial picture is strong.
High Net Worth Individuals with Asset Liquidity: Perhaps you have a significant amount of money tied up in assets like stocks or investment properties. Non-QM loans can consider your asset value alongside your income to determine your borrowing power.

The key thing to remember is that non-QM loans focus on your overall financial health, not just a single factor. While a strong credit score and stable income are always positive indicators, non-QM lenders take a more comprehensive approach to assess your ability to repay the loan.

Who Should Consider a Non-QM Loan to Buy a Home?

While non-QM loans can be a valuable tool for many, they aren’t a one-size-fits-all solution. Here’s a breakdown of who might benefit most from a non-QM loan for their home purchase:

Individuals with Non-Traditional Income: This is the sweet spot for non-QM loans. Freelancers, self-employed individuals, commission-earners, and those with rental income can leverage bank statements, tax returns, and business financials to demonstrate their earning potential, even if they lack traditional W-2s.
Those with Recent Credit Blemishes: Life happens, and credit scores can take a hit. Non-QM loans may be more forgiving of past credit issues, especially if your overall financial picture is strong and your income is steady.
High Net Worth Individuals with Low Income: Maybe your income on paper doesn’t reflect your true financial picture. If you have significant assets like investments or real estate, non-QM loans can consider those assets alongside your income to determine your ability to repay the loan.

However, non-QM loans aren’t for everyone. Here’s when a traditional mortgage might be a better option:

Strong Credit Score and Stable W-2 Income: If you have a stellar credit history and consistent income from a salaried position, a traditional mortgage will likely offer you the best interest rates and terms.
Limited Down Payment: While some non-QM loans allow for lower down payments, they often come with stricter requirements. If you have a smaller down payment saved, a traditional mortgage might be more accessible.

Ultimately, the best loan choice depends on your unique financial situation. If you’re unsure whether a non-QM loan is right for you, consulting with a mortgage professional is key. They can assess your finances and guide you toward the loan option that best fits your needs and goals.

Pros and Cons of Using a Non-QM Loan

Non-QM loans offer a lifeline for borrowers with non-traditional income, but they come with their own set of considerations. Let’s break down the key advantages and disadvantages to help you decide if a non-QM mortgage is the right path for your homeownership journey.

Pros of using a Non-QM Loan:

Income Flexibility: This is the biggest perk. Non-QM loans consider various income sources beyond W-2s, making them ideal for freelancers, self-employed individuals, commission earners, and real estate investors. Bank statements, tax returns, and business financials can all be used to demonstrate your earning potential.
Credit Score Leniency: While a good credit score is always helpful, non-QM loans may be more forgiving of past credit issues, especially if your overall financial situation is strong and your income is steady.
Lower Down Payment Options: Some non-QM loan programs allow for a lower down payment compared to traditional mortgages. This can be particularly beneficial for first-time homebuyers who may not have saved a substantial amount for a down payment.

Cons of using a Non-QM Loan:

Higher Interest Rates: Since non-QM loans involve more complex underwriting and cater to borrowers deemed slightly riskier by traditional standards, they often come with higher interest rates compared to qualified mortgages. This translates to a higher monthly payment over the life of the loan.
Stricter Terms: Non-QM loans may have stricter terms compared to traditional mortgages. This could include shorter loan durations, higher closing costs, or prepayment penalties.
Potentially Complex Application Process: While the income verification process might be more flexible, the overall application process for non-QM loans can be more complex compared to traditional mortgages due to the additional documentation required.

Choosing Your Loan Expert Can Make a Huge Difference In Your Mortgage Options

Ultimately, the decision between a non-QM loan and a traditional mortgage depends on your specific financial circumstances. Defining those differences can be tricky if you’re using a traditional, cookie-cutter lender. Finding a mortgage broker with more flexibility than traditional lenders can be the best choice for you if you feel that a Non-QM loan is for you. With a wide assortment of loan products to choose from, a mortgage broker can act as your personal mortgage shopper, strategizing the right program and lender for your specific financial needs.

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How to Qualify for a Non-QM Loan

While traditional mortgages have strict requirements, non-QM loans open doors for a wider range of borrowers. But how do you know if you qualify? Here’s a breakdown of the key factors lenders consider:

Income Verification

Unlike traditional loans relying on W-2s, non-QM loans offer flexibility. Lenders may consider:

Bank Statements

Showcasing your income deposits over 12-24 months can paint a clear picture of your earning potential.

Tax Returns

Self-employed individuals and freelancers can leverage past tax returns to demonstrate income consistency.

Business Financials

For business owners, profit and loss statements and tax filings can be used to verify income.

Credit Score

A good credit score is always a plus, but non-QM lenders may be more flexible with past credit issues, especially if your overall financial picture is strong and your income is demonstrably steady.

Debt-to-Income Ratio (DTI)

This ratio compares your monthly debt payments to your gross income. A lower DTI indicates a stronger ability to manage another loan payment.

Assets

For some non-QM loan options, your assets like stocks, bonds, or even another property can be considered alongside your income to determine your ability to repay the loan.

While these are the main criteria, remember that non-QM loans are more nuanced. A qualified mortgage professional can delve deeper into your specific situation. They can assess your unique financial strengths, such as a history of on-time rent payments or a strong savings record. This can help increase your chances of qualifying for a non-QM loan with favorable terms.

The key takeaway? Don’t be discouraged by a non-traditional income source or a less-than-perfect credit score. Explore your options with a non-QM loan specialist. They can guide you through the qualification process and help you unlock the door to your dream home.

FAQs About Non-QM Mortgages

Are Non-QM mortgages more expensive?

Non-QM mortgages can sometimes have higher interest rates than traditional mortgages due to the more complex underwriting process and catering to borrowers with slightly more risk. However, they can still be a viable option for many, especially considering the flexibility they offer in income verification.

How are Non-QM mortgage payments calculated?

Non-QM mortgage payments are calculated similarly to traditional mortgages, factoring in the interest rate, loan amount, and loan term. However, the qualifying process may consider additional factors like your bank statements or business financials, which can influence the interest rate you receive and ultimately impact your monthly payment. Working with an experienced mortgage broker can make the qualification process simpler.

Is PMI required for Non-QM mortgages?

Private Mortgage Insurance (PMI) is often required for non-QM loans if your down payment is less than 20% of the property value. This additional insurance protects the lender in case of default. Talk to the Abo team about strategizing your mortgage to optimize your payment.

What type of property can you purchase with a Non-QM loan?

Non-QM loans can be used to finance various property types, including single-family homes, condos, townhouses, and even multi-unit investment properties, depending on the specific loan program. Consult with a non-QM lender to explore the options that best suit your needs and desired property type.