What Is A Non-QM Loan?
Attempting to buy a home in California in this market can be both exciting and tough. Getting pre-approved for a mortgage is the first step in the home buying process, but what if you don’t qualify for a traditional loan? Enter the non-QM (non-qualified mortgage) loan, which could be the answer for you. But what is a non-QM loan? Let’s take a look.
First, Let’s Talk About a QM Loan
A qualified mortgage loan is under government-mandated regulations to provide more financially sustainable home loans for consumers.
The Consumer Financial Protection Bureau passed the Dodd-Frank Wall Street Reform Act to respond to the Great Recession of 2008. Qualified mortgage loans require that loans cannot have negatively impacting features, like those that sealed the fate of the crash of 2008.
The act ensures that all lenders apply the ability-to-repay (ATR) rule diligently. The ATR means that lenders must have stringent guidelines that borrowers must meet to qualify for loans. Those requirements include:
- A debt-to-income ratio of 43% or less
- The loan must be eligible for purchase no matter the DTI ratio
- It must be originated by insured depositories with total assets less than $10 billion, in portfolio holding for three or more years
What Is a Non-QM Loan?
A non-qualified mortgage is specifically for homebuyers who cannot meet at least one or more of the Dodd-Frank Wall Street Reform Act criteria. However, non-QM loans still require ATR verification and other requirements.
What Are the Benefits of a Non-QM Loan?
Many borrowers have a substantial income but are unable to meet the criteria of a qualified mortgage. These borrowers often have full ability to repay with long and solid credit histories, plenty of documentation, and substantial assets. The borrower won’t be approved for the loan if the QM standards aren’t met.
It can be frustrating for entrepreneurs and contractors that have considerable assets but less consistent income. Further, borrowers who invest in real estate or live off returns will always have a higher DTI than is allowed through QM regulations. Non-QM loans allow qualified borrowers another pathway for buying a home.
What Are the Drawbacks?
Higher interest rates and fees are the most prominent drawbacks of non-QM loans. Because they can be challenging to obtain and find, the rates may be less than competitive. Non-QM loans are also taking just a little longer to complete than traditional QM loans.
One last consideration to talk to your funding specialist about is how much of a down payment will be necessary.
We’re Here To Answer Your Questions
Contact UW Funding today to learn more about how non-QM loans allow greater flexibility in repayment, as well as in qualification.