5 Things You Should Know About Non-Qualified Mortgages

You’re ready to start your home buying journey, but even the first step in the process can leave you questioning how you will finance your home purchase. If you’re planning to apply for a qualified mortgage with a W-2 job as your source of income, it can seem like a straightforward process.

But what if you’re a gig worker, 1099 employee, or own your own business? Maybe you’re a contractor, or you freelance for various projects. Most lenders consider these employment situations as self-employment, which means you’ll need to utilize a non-qualified mortgage product to finance your home. Non-QM loan products are also useful for real estate investors, as they offer an alternative to higher-interest hard money loans. 

That opens the door to more questions, starting with What is a non-qualified mortgage? In short, a non-qualified mortgage is a loan that doesn’t meet the standards of a qualified mortgage and uses non-traditional methods of income verification to help you get approved for your loan. We want to help make the process of getting approved with a non-QM loan easier. That’s why we’re highlighting five things you should know if you’re looking at financing a home with a non-QM lending option.

You Can Usually Qualify for a Non-QM Loan with a Lower Credit Score

Qualified mortgages must meet standards set forth in the Consumer Protection and Dodd-Frank Wall Street Reform Act. Non-qualified mortgages aren’t backed by federal programs, and therefore don’t have to meet those specific guidelines.

When approving and underwriting non-qualified mortgages, lenders are usually more interested in seeing that you have access to funds and a steady stream of income that will allow you to make your monthly mortgage payments on time, rather than a certain credit score. That being said, there will still be minimum credit score requirements that vary by lender. The minimum requirement for a non-qualified mortgage is usually around 100 points less than its qualified mortgage counterpart.

Non-Qualified Loans Have More Options for Income Documentation than Qualified Mortgages

This is a key attribute that you’ve probably already heard if you’re looking into financing your home with a non-qualified mortgage. Qualified mortgages must meet regulations on income verification and debt ratios. Because of those provisions, self-employment and other types of non-W-2 income are not typically able to be accepted.

Of course, lenders offering non-qualified mortgages will still need to ensure you’re bringing in a steady income. They’ll review your income documentation and confirm that you can afford to make your mortgage payment while staying current on your other debt obligations.

Here are some common items lenders are looking to confirm about non-qualified mortgage applicants’ income:

• Prove income stability
• Explain the industry or type of self-employment
• Provide documentation showing the financial strength of your business
• Present a strong case about your business’s sustainability to generate income long term

These are some types of documents that can support your income verification when applying for a non-QM loan:

• Your last two years of personal federal tax returns 
• Two months of complete bank or other asset account statements, both for your personal and business accounts.

Non-QM Lending Options Can Usually Accommodate Higher DTI Ratios

While other loans programs may mandate your debt-to-income ratio be under a certain percentage, non-qualified mortgages offer homebuyers flexibility within criteria set by the lender. Lenders will still make sure you can afford your bills, including your new mortgage, but since they are taking the financial risk in lending you the funds for your purchase, they can set their own requirements.

In general, lenders can accommodate DTIs with a few additional percentage points for non-qualified mortgage loans than they would be able to with qualified mortgage guidelines. Since each lender’s requirements for their non-qualified mortgage programs will vary, it’s best to work with your loan officer for specific requirements.

Interest Rates and Fees May Be Higher with Non-QM Loans

There are many advantages we’ve covered about non-qualified mortgages. However, there are some potential disadvantages you’ll want to be aware of. The first is that while lenders can develop loan requirements outside of the federal requirements set for qualified mortgages, they also have flexibility in setting the fees they charge for non-qualified loans.

Since non-qualified loans aren’t backed by any government agencies and involve more risk for your lender, points, fees, and the interest rate tend to be higher. That being said, market forces and competition help keep these offerings within reason of other market rates.

Not As Many Lenders Offer Non-Qualified Mortgages

While we’re covering this potential disadvantage last, it could be one of the first you encounter as you search for a lender to get a non-qualified loan from. Because of the financial risk involved in offering loans that aren’t backed by federal government programs, some lenders don’t offer non-qualified mortgages at all.

Don’t get discouraged, though. Many lenders do offer these loans, especially with the rise in self-employment, business ownership, and the gig economy. A quick online search will help you identify lenders that offer non-qualified mortgages and help you get started on your mortgage application process.

The best way to start the process of getting a non-qualified mortgage is to find a lender that offers them. Then, chat with an experienced loan officer. Once you give them some insight into your employment and financial situation, they will be able to review which products their institution offers that can meet your needs. Get started on the pre-qualification process with one of our loan officers today.