What is a Non-QM Loan?

Non-QM stands for Non-Qualified Mortgage, designed for borrowers who do not meet the requirements of standard loan programs. These loans typically cater to individuals with unique income streams such as:
  • Self-employed business owners
  • Entrepreneurs
  • Contractors
  • Hospitality workers
  • Retirees
  • Actors and artists

Key Features of Non-QM Loans

Alternative Income Verification
Unlike traditional mortgages requiring tax returns, W-2s, or pay stubs, Non-QM loans use other methods such as bank statements, asset documentation, or a single year of tax returns.
Flexible Credit Terms
Non-QM loans can accommodate borrowers with significant credit events like foreclosure or bankruptcy.
Not CFPB Qualified
They do not meet the Consumer Financial Protection Bureau's (CFPB) standards, which include rigorous income vetting and standard terms and conditions.
Risk and Safety
Despite not being "Qualified Mortgages," Non-QM loans are not inherently risky. They simply cater to non-traditional credit profiles.

Qualified vs. Non-Qualified Mortgages

Qualified Mortgages (QM)
  • Use standard income verification methods
  • Guaranteed by entities like FHA, VA, Fannie Mae, or Freddie Mac
  • Provide lenders with safe harbor against lawsuits from borrowers who default

Non-Qualified Mortgages (Non-QM)

Non-Qualified Mortgages (Non-QM)
  • Use alternative income verification methods
  • Not guaranteed or backed by government entities
  • Do not offer lenders the same legal protections

Who Benefits from Non-QM Loans?

Self-Employed Borrowers
Often have sporadic income and multiple income streams, making traditional income documentation difficult.
Prime Borrowers
Individuals with great credit looking for loans with interest-only payments or higher debt-to-income ratios.
Near/Non-Prime Borrowers
Those with limited credit history or recent credit events such as bankruptcy or foreclosure.
Asset-Rich Borrowers
Individuals with substantial assets who prefer to maintain liquidity rather than making an outright cash purchase.

How Do Non-QM Mortgages Work?

Non-QM loans use alternative methods of income verification to qualify borrowers. Lenders may offer features such as:
  • Longer loan terms
  • Interest-only payments
Each lender has specific terms and conditions, so it is essential to review individual agreements.
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What Non-QM Loans Are Not

Subprime Mortgages
These are for borrowers with significantly low credit scores.
Stated-Income Loans
Loans that did not require income proof.

What Non-QM Loans Are

  • Home financing solutions for responsible borrowers with unique financial circumstances
  • Flexible options covering various consumer needs
  • Available to borrowers with recent credit events like bankruptcy or foreclosure
  • Open to foreign nationals and applicable for multiple properties

Common Income Verification Methods for Non-QM Loans

Full Documentation
Same as Qualified Mortgages.
One-Year Tax Return Program
  • Personal and business tax returns for the past year
  • Business profit and loss statement
12-Month Bank Statement Program
  • Personal or business statements
  • Profit and loss statement for 12 months or the previous year, and year-to-date (YTD)
Asset Qualifier
  • 60-day account history
  • 100% vested retirement assets for borrowers over 59 ½ years old
  • 70% vested retirement assets for borrowers under 59 ½ years old

Benefits of Non-QM Loans

  • Suitable for self-employed and non-traditional financial profiles
  • Accept alternative income verification methods
  • Offer multiple fixed and adjustable loan options
  • Allow loan amounts up to $2.5 million
  • Enable cash-out up to $500,000
  • Eligible for second homes and investment properties
  • Help maintain liquidity and diversify investments
  • Mortgage interest payments may be tax-deductible (consult a tax advisor)

Non-QM Eligibility

A loan officer can assess your individual needs to determine if a Non-QM loan is suitable for you. Factors considered include employment, assets, and income profile.
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