Non-QM (How They Work)

Looking for a mortgage but your financial situation or credit history is unstable? Worry not, we've a solution for you! Non-qualifying or Non-QM loans can be your best bet in this case. Non-qualified mortgage loans need not meet the requirements of Consumer Financial Protection Bureau-qualified mortgages. Although these loans are comparatively costlier than traditional mortgages and accompanied by a higher default risk, they serve a crucial purpose for borrowers who might otherwise be unable to secure a mortgage. 

So, in this blog post, we'll cover everything, including what Non-QM loans are, what are the pros and cons, and how risky it is. Read on to know more about these.

The History of Non-Conforming Loans

When the Great Recession happened, the mortgage industry was badly affected. Consequently, lending rules and standards were tightened to prevent another such crisis in future. With some of the best practices infused by the lending industry to ensure that the borrowers could pay back the mortgages,  the developments post-recession were positive.

However, stricter rules meant that many borrowers who had difficulty meeting qualification prerequisites struggled to obtain conforming mortgages. This was often the case for self-employed individuals or freelancers.

In such scenarios, Non-QM or non-conforming loans provide some relief to such borrowers. However, there are many pros and cons to Non-QM loans, and you should have complete knowledge to make a well-informed decision. 

What are Non-QM loans?

A non-qualified mortgage loan is a mortgage that does not meet the qualified mortgage requirements. 

A qualified mortgage is a mortgage loan with borrower-friendly characteristics and qualities so that the chances of loan default are minimal. Qualified mortgages are overlooked by the Consumer Financial Protection Bureau (CFPB). Some of the qualities include reasonable fees and friendly debt-to-income ratios. In such cases, the lenders need to follow specified documentation practices and processes to ascertain the borrower's income and ensure that the borrower can repay the loan.

Non-qualifying home loans are an excellent alternative to conforming home loans, but they come at a price. 

Who can avail of Non-QM loans?

This kind of home loan is suitable for individuals who do not have a typical financial situation to qualify for a conforming mortgage even though they can afford it. 

The borrower can be part of the gig landscape, with their income getting credited to PayPal, Venmo, or other sources that are not usually associated with regular payments. The borrower can have a short credit history. 

Some lenders offer Non-QM loans to borrowers facing bankruptcy or foreclosure. They could also have other adverse incidents on their credit history. For instance, individuals facing foreclosure may need to wait for 7 years to qualify for conforming loans. In such a case, the non-qualifying home loan is a better alternative as it does not have a waiting period.

An example of a non-qualified mortgage loan is the bank statement loan. In this case, the borrower produces bank statements to prove their income. Tax documents may not be required to get approval for the loan.

Non-QM loans Pros and Cons 

Non-QM loans can be helpful if you don't qualify for another type of mortgage, but they're often expensive and risky. 

Do non-qualified mortgage loans classify as conventional Loans?

Non-qualified mortgage loans, while they may share some similarities with conventional loans, do not have the same government backing. In this context, 'conventional loans' refer to 'conforming loans,' Which are conventional loans that meet the guidelines of Freddie Mac or Fannie Mac. Understanding these distinctions can help borrowers make more informed decisions about their mortgage options.

Non-qualifying home loans are less affordable compared to conforming loans. Therefore, borrowers who qualify for both should prefer a conforming loan instead of the Non-QM version. 

For example, conventional loans usually require a lower down payment than the Non-QM version. Similarly, the interest rates in the former case are at least 2% or 3% lower than the latter. 

Borrowers who think they may not qualify for a conforming loan must still consult with a lender or a loan officer to try different avenues of a mortgage loan. Remember, even with inconsistent incomes, you can be eligible for a conforming loan. Self-employed people may also qualify for conforming loans, but these avenues must be checked out first. 

Are Non-QM loans Risky?

In most cases, non-qualified mortgage loans are risky as the features are not part of the qualified mortgage scenarios. As per the CFPB, the risky features are - 

• Tenure can be more than 30 years.

• There are interest-only periods where the payment is only interest payments, and the loan principals are not getting paid.

• Negative amortization is another case that makes loans riskier. In such cases, the loan principal multiplies with time. This occurs when the payments fall short to cover interest payments, and the differential gets added to the principal.

• In most cases, the payments at the end are way more than the regular monthly payment, also called balloon payments.

Conclusion

If you are also facing challenges in securing a conforming loan then consider Non- QM loans to fulfill your requirements. Check out Total Mortgage for trusted lenders who can offer you Non-QM loans in a hassle-free manner.