Non-qualified mortgage (Non-QM) loans are designed for those with unconventional circumstances, such as an irregular income, who are not able to qualify for a traditional mortgage. Think self-employed individuals like freelancers, contractors, and small business owners. While non-QM loans may come with higher costs, they have less stringent borrower requirements and can be a viable financing option for those with unique income situations.
Many people dream of owning a charming three-story home nestled within a peaceful suburban neighborhood, complete with a white picket fence and sprawling backyard. It’s the quintessential American dream: having a place to call your own.
A home is one of the most significant financial investments you can ever make. So it’s not surprising that lenders want to do their due diligence before approving a loan. However, for self-employed individuals, securing a mortgage without a W-2 income will typically have to jump through a few extra hoops. The good news is that conventional mortgages are not the only financing options on the market.
Non-qualified mortgages — that is, home loans that do not meet the qualified mortgage (QM) guidelines — can offer a practical solution for those with unconventional income situations, providing an accessible path to homeownership. Read on to learn more about how to apply for a non-qualified mortgage and whether it’s a wise financial move for you.
What are non-qualified mortgages?
Simply put, non-qualified mortgages, or non-QMs, are home loans that do not meet the qualified mortgage (QM) guidelines set by the Dodd-Frank Wall Street Reform and Consumer Protection Act. Compared to traditional mortgages, non-qualified mortgages are much more flexible in their underwriting process, making them suitable for borrowers with non-traditional income sources, such as freelancers and small business owners. However, while these types of mortgages are more flexible, they may come with higher risks for the borrower.
Requirements for non-QM mortgages
Lending criteria vary depending on the financial institution, but here are some of the most common requirements for non-QM mortgages:
- A decent credit score
- A debt-to-income ratio (DTI) of at least 50%
- Proof of self-employment income for the past two years
- Personal or business bank statements from the past 12 to 24 months
- A business license or other documentation related to your business
Compared to traditional mortgages, the requirements for non-QM mortgages are less stringent, since they’re not subject to the same standards that traditional FHA, VA, or USDA loans require.
Applying for a non-qualified mortgage: a step-by-step guide
If you’re unable to qualify for a conventional mortgage due to your unique income situation as a self-employed individual, don’t fret. Here’s a simple step-by-step guide on how to apply for a non-qualified mortgage:
1. Find lenders that offer non-QM loans
First, make a list of lenders that offer non-QMs and carefully research each of them. Understand their lending requirements, read reviews online, and check each lender’s Better Business Bureau (BBB) profile to ensure its legitimacy.
2. Gather documentation
Once you’ve found a few lenders who offer non-qualified mortgages, it’s time to get all your documentation in order. While standard home loans typically require tax documents to prove your self-employed income, non-QMs are more flexible. Instead of providing your tax returns, you can prove your income for a non-QM loan with the following documents:
- Pay stubs
- Bank account statements
- Business documents
- Profit and loss statements
- A letter from your CPA with their letterhead confirming they handle your business finances
3. Get pre-approved for a non-qualified mortgage
By getting pre-approved for a loan, you’ll know how much a lender is willing to let you borrow, which will help narrow your property search. When you apply for pre-approval, lenders will scrutinize your income, creditworthiness, and assets to determine how much they can lend you and what interest rates to offer.
Remember, getting pre-approved does not affect your credit score, as it only requires a soft credit pull. Try getting at least three pre-approval letters from three different lenders to get the best deal possible.
4. Compare loan offers
After you’ve received pre-approval letters from at least three different non-qualified mortgage lenders, compare the offers. The terms in the loan estimates detail what each lender expects to offer you if you decide to move forward with your loan application. Compare interest rates, fees, monthly payments, and downpayment requirements to find an option that makes the most financial sense for you.
If you need help reviewing your loan estimates, consider contacting a housing counselor. You can find a HUD-certified housing counselor online or by calling 1-800-569-4287.
5. Complete the loan application and wait for approval
When you’re ready to commit to a specific lender, submit a loan application along with all the necessary documentation. Some non-qualified mortgage lenders may look at your income and debt-to-income ratio, while others will focus on different criteria. Either way, your chances of getting approved for a non-QM loan are generally higher than for a conventional mortgage due to the flexible requirements. However, because guidelines for non-QM loans are less standardized, the underwriting process can take longer than for conventional loans.
6. Close the loan
Once your loan has been approved, the lender will provide a closing disclosure that outlines the details of your mortgage. Review this document carefully and ensure you read the fine print before signing. Keep in mind that since non-QM loans aren’t backed by any government program, lenders can essentially charge whatever they want on these loans, so be sure to do your research when choosing a lender to avoid ending up with hefty closing costs and origination fees.
What to be aware of when applying for non-qualified mortgage loans
Non-qualified mortgages are viable alternatives to traditional home financing options. However, because of their limited regulatory protection, it’s important to do your research when applying for these types of loans. Here are a few points you should be aware of before signing on the dotted line of your mortgage contract:
- Higher interest rates: Non-qualified mortgages often have higher interest rates than their qualified counterparts. According to James Allen, Certified Financial Education Instructor (CFEI) and founder of Billpin.com, “This is because lenders consider these loans riskier due to the borrower’s inability to meet the standard qualifying criteria. The increased interest rate is a way for lenders to mitigate potential losses should the borrower default on the loan. Therefore, borrowers should be prepared for potentially higher monthly payments and overall loan costs.”
- Less protection: Another point you should be aware of before applying for non-QM loans is that they do not have the same borrower protections as qualified mortgages. As Allen points out, “Qualified mortgages prohibit risky loan features like negative amortization and interest-only payments, but non-QM loans may include these features. Borrowers should thoroughly understand the terms of their loan agreement and consider seeking advice from a financial advisor or attorney to ensure they are not exposing themselves to undue risk.”
- Adjustable-rate mortgages (ARMs): According to Michael Borodinsky, mortgage professional and branch manager of Caliber Home Loans, “Many non-QM loans are structured as adjustable-rate mortgages, which means the interest rate can change over time. Borrowers should carefully evaluate the terms of the loan, including the adjustment period, rate caps, and the potential impact on their monthly payments. It’s also crucial to consider future interest rate scenarios and assess whether the loan is affordable in different market conditions.”
Do banks offer non-QM loans?
Yes. While many financial institutions have steered away from non-qualified mortgages and subprime loans due to their risks, some banks still offer non-QM loans for borrowers who don’t meet traditional mortgage lending requirements. Before committing to a lender, do your due diligence so you know what you’re getting yourself into; because these loans typically come with much higher interest rates, ensure you’re financially stable and are able to repay the loan on time.
Is a non-QM loan a good idea?
While non-qualified mortgages may come with higher interest rates and the risk of default, they offer you a chance to secure financing and achieve your homeownership dreams even if you don’t meet traditional lending requirements. Whether taking out a non-QM loan is a good idea will depend entirely on your individual circumstances.
If you’re confident you can comfortably afford the down payment and monthly mortgage payments, a non-QM loan can be a viable option. However, if you’re already on a tight budget and have income that fluctuates substantially from month to month, it’s better to hold off financing a home with a non-QM loan until you’re more financially secure.
What is the interest rate for a non-QM loan?
The interest rate for a non-qualified mortgage loan varies from lender to lender, but depending on the loan terms, it will generally be 0.5% to 5% higher than that of a qualified mortgage. Take the time to shop around to secure the best rates so you won’t end up with unaffordable mortgage payments and risk defaulting on the loan.
What are examples of non-QM loans?
Non-QM loans are a category of loans that do not meet the Consumer Financial Protection Bureau’s guidelines. Here are some common types of loans that fall under this category:
- Bank statement loans
- Debt service coverage ratio (DSCR) loans
- Asset depletion loans
- ITIN non-QM loans
- Foreign national loans
- Non-prime/non-agency loans
- Investor cash flow loans
- Cross collateralization loans
What are the four types of qualified mortgages?
According to the National Credit Union Administration, there are four types of qualified mortgages: general, temporary, small creditor, and balloon-payment. All lenders can originate general and temporary qualified mortgages. On the other hand, small creditor and balloon QMs can only be originated by institutions that meet the definition of “small creditors.”
- Non-qualified mortgages (non-QM loans) are home loans that do not meet the qualified mortgage (QM) guidelines set by the Dodd-Frank Wall Street Reform and Consumer Protection Act.
- Non-QMs are typically more flexible in their underwriting process, making them suitable for freelancers, contractors, small business owners, and any other borrowers who don’t have a traditional source of income.
- To apply for a non-QM, find lender who offer them, then gather the necessary documentation, get pre-approved, compare loan offers, complete the loan application, and close the loan.
- Be aware that non-QM loans have limited regulatory protection and may come with higher interest rates and fees. Make sure you can afford the monthly payments before you apply.
As with any other major financial decision, it’s crucial to do your due diligence before committing to a non-QM loan. Take the time to scrutinize your financial situation, risk tolerance level, and long-term plans before signing on the dotted line. If you need guidance throughout the process, consult a financial advisor or mortgage broker who can provide insights tailored to your unique circumstances.
If you think you may be able to qualify for a traditional mortgage instead, check out SuperMoney’s list of the best mortgage lenders to see if one of them may be a good fit for you!
View Article Sources
- Ability-To-Repay and Qualified Mortgage Requirements from the Consumer Financial Protection Bureau (CFPB) – National Credit Union Administration
- Find a housing counselor – Consumer Financial Protection Bureau
- What is a Qualified Mortgage? – SuperMoney
- What Is A Non-Qualified Mortgage (Non-QM Loan) – SuperMoney
- Non-QM Loans: A Guide For Non-Traditional Borrowers – SuperMoney
- What Is A Subprime Mortgage? – SuperMoney
- What is a DSCR Loan? Debt Service Coverage Ratio Definition and Examples – SuperMoney
- How To Get Loans With an ITIN Number – SuperMoney
- Foreign National Mortgage & Home Loan Guidelines in 2023 – SuperMoney
- Cross Collateralization: What Is It and How Does It Work? – SuperMoney
- How to Find a Financial Advisor You Can Trust – SuperMoney