Buying a home isn’t always as clear-cut as applying for a mortgage, getting approved, and moving in. In fact, it rarely is. If you have a unique financial situation, getting approved for a traditional Qualified Mortgage (QM) may be challenging. Non-Qualified Mortgages can provide borrowers with an alternative lending option. Read on to learn more about them and to see if they may be right for you.

Qualified Mortgages (QMs) Versus Non-Qualified Mortgages (Non-QMs)

A Qualified Mortgage is one that meets certain standards established by the federal government. They were born in response to the Subprime Mortgage Crisis of 2008. In summary, their goal is to curtail predatory lending practices.

Foremost, QMs meet the “ability-to-repay” rule, meaning that the lender has determined in good-faith that a borrower has the ability to repay the mortgage before letting them take it out. They consider factors like a borrower’s income, credit history and employment. They also analyze other factors, such as if borrowers are well-suited for adjustable rate mortgages.

The Consumer Finance Protection Bureau argues that Qualified Mortgages have “more stable” features than Non-Qualified Mortgages. Ultimately, what separates the two types of mortgages is that QMs have to abide by a lot more rules in order to attain that designation. Per the CFPB, some of these rules include:

  • Limits on the amount of up-front fees that the lender can charge you.
  • No “interest-only” periods.
  • The borrower’s debt-to-income ratio must be 43% or less.
  • Loan terms cannot be longer than 30 years.

Non-QMs, on the other hand, do not meet these standards. Therefore, non-QM underwriters have a lot more flexibility when writing the terms of a loan. Non-Qualified Mortgages often get a bad rep for being “riskier” loans, but that is not always necessarily the case.

Who Do Non-Qualified Mortgages Benefit?

Because non-QMs have less traditional terms, they offer more flexibility. Therefore, they’re best suited for borrowers who can’t satisfy the requirements of a Qualified Mortgage, including:

  • Self-employed borrowers who do not have access to traditional methods of verifying income, like a W-2 tax form.
  • Borrowers who have a high debt-to-income ratio.
  • Borrowers who are foreign nationals.
  • Borrowers who have low FICO score.

In short: Non-Qualified Mortgages can be a great resource for borrowers who don’t meet a laundry list of traditional lending standards.

Different Types of Non-QMs

There are a multitude of non-traditional loan programs to suit a variety of borrowers. We’ll break down a couple of common examples below.

Bank Statement Mortgage Programs

Bank statement mortgage programs are ideal for borrowers that do not have typical documentation for verifying income. Many Qualified Mortgages require documents such as W-2 forms and tax returns for this purpose. However, if you are self-employed or have multiple lines of income, this may prove difficult. With a bank statement loan, applicants can use statements from their personal or business bank accounts to prove their income. Some typical requirements of these programs include:

  • Larger down payments/higher interest rates than conventional loans.
  • A “fair” credit score (exact score minimums vary from lender to lender).
  • At least one-to-two years’ worth of bank statements.
  • An official letter from your accountant confirming that you file your tax returns as an independent contractor.
  • These are just general program requirements; specific requirements for bank statement mortgage loans may vary slightly from lender to lender.

Individual Tax Identification Number (ITIN) Loans

 ITIN Mortgage Loans are for people looking to buy a home in the U.S. but do not have a social security number. This program is ideal for folks who are foreign nationals/immigrants. Some of their typical requirements include:

  • Larger down payments/higher interest rates than conventional loans.
  • Credit score greater than 620.
  • Debt-to-income ratio less than 55%.
  • Tax returns/bank statements to document income.

These are just general program requirements; specific requirements for ITIN Loans may vary slightly from lender to lender.

Explore Your Options

The above programs are just two examples of common Non-QM lending programs. If you think a Non-QM might be right for you, shop around and explore all of your options. A program that works perfectly for one lender may not work for you. Each borrower’s financial situation is unique, and Non-QM programs offer homebuyers more flexibility.

The Takeaway: Many regulatory bodies are quick to demonize Non-Qualified Mortgages. However, just because these loan programs sometimes offer “riskier” terms (like higher interest rates) doesn’t automatically mean they are “bad” or “predatory.” In fact, Non-QMs can open doors for homebuyers who don’t fit the mold of many traditional loan requirements. They can be more flexible alternatives for those with unique financial situations. As always, though, it’s important to shop around and be informed of all of your options. Don’t go with a certain loan just because the terms are lax and it seems “easy.” Instead, make sure that a loan is a complement to your financial situation rather than a detriment.

Disclaimer: These articles are intended for general informational purposes only and do not substitute the advice of qualified mortgage professionals. Please always consult your mortgage broker or loan officer when it comes to making decisions.

About Brookelynn Ruggirello

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