What is a Non-Qualified Mortgage?

As you work your way through the home buying process, you’ll begin to realize that mortgage lenders typically have a set of requirements in order to qualify you for a home loan. These might include having a steady income, at least two years of employment history, and outstanding credit history, among others.

It’s important to remember that this does not mean your home is out of reach.

Mortgage lenders understand that not every homebuyer fits into the same mold. There are plenty of mortgage solutions for borrowers with unique financial backgrounds, such as non-qualified mortgages, that can help make homeownership possible.

What is a Qualified Mortgage?

In order to better understand a Non-QM, it is helpful to be familiar with the criteria of a qualified mortgage. A qualified mortgage (QM-loan) is a home loan that meets certain standards set forth by the Consumer Protection Act and the Dodd-Frank Wall Street Reform Act, signed by President Obama following the 2008 housing crisis.

The requirements for a qualified mortgage include:

• Verification of income is required, otherwise known as the “ability-to-repay” rule
• Debt ratio cannot exceed 43%
• Points and fees should not exceed 3% of the loan amount
• The loan cannot have risky features such as negative amortization or interest-only
• The loan term cannot exceed 30 years

These guidelines were adopted by the Consumer Financial Protection Bureau (CFPB) to help prevent poor lending practices that sparked the previous financial crisis.

What is a Non-Qualified Mortgage?

A Non-Qualified Mortgage (Non-QM) is a loan that doesn’t meet the standards of a qualified mortgage and uses non-traditional methods of income verification to help a borrower get approved for a home loan. These types of loans are for borrowers with unique income qualifying circumstances.

Who Can Benefit from a Non-QM Loan?

Non-QM loans fill the gap for borrowers who may be self-employed, have non-traditional income, or have had difficulty qualifying for a QM loan due to credit issues in the past. Non-QM loans have underwriting guidelines that allow the lender to view the “bigger picture” of your financial history thus determining a borrower’s ability to repay in a slightly different lens than usual.

You may find a Non-QM loan beneficial if you are any of the below:

• Self-employed borrower
• Real estate investor
• Foreign national
• Prime or non-prime borrower
• Borrowers with significant assets
• Medical professional

A non-QM loan may be used for new home purchases, refinances, investment homes, or second homes.

Are Non-QM Loans a Safe Option?

A common misconception is that non-QM loans are “bad loans” in disguise. Similar to QM loans, these types of loans have their own set of guidelines to ensure that the borrower and lender are protected from a high-risk loan. The lending process is quite similar, just with a different set of documents during the application process.

Do You Qualify for a Non-QM Loan?

A First Heritage Mortgage loan officer can help identify your goals to determine which of our non-QM mortgage solutions may be best for your unique financial situation.