What is a Non-QM Loan?

As you work your way through the home buying process, you’ll begin to realize that mortgage lenders typically have a set of requirements 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 Does “QM” Mean in Mortgage Lending?

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
• The 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-QM Loan?

A Non-QM loan is a mortgage that allows borrowers who don’t meet traditional income verification standards, like self-employed individuals or real estate investors, to qualify using alternative documentation such as bank statements or assets.

Who Qualifies for 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.

Types of Non-QM Loan Programs

Non-QM loans cover a range of mortgage programs designed to help borrowers with unique financial situations. Each program uses different ways to verify income or assets, giving more flexibility than traditional qualified mortgages.

Bank Statement Loans
Bank statement loans use personal or business bank statements instead of tax returns to verify income. They are popular among self-employed borrowers and small business owners whose income may not show accurately on paper.

DSCR Loans (Debt Service Coverage Ratio)
Designed for real estate investors, DSCR loans qualify borrowers based on the property’s cash flow rather than personal income. If the rental income covers the mortgage payment, the borrower can often qualify without traditional income documentation.

Asset-Based Loans
Borrowers can use liquid assets such as savings, investment portfolios, or retirement funds to show their ability to repay. This option works well for retirees or individuals with high net worth but limited monthly income.

ITIN Loans

Individual Taxpayer Identification Number (ITIN) loans are designed for non-U.S. citizens who do not have a Social Security number, but do have an ITIN. This allows foreign nationals to buy property in the United States. Lenders use international income or asset verification to assess the borrower’s ability to repay.

In summary, each of these Non-QM loan programs serves a specific purpose, helping borrowers find a financing option that aligns with their lifestyle, income, and long-term goals.

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.

Frequently Asked Questions (FAQ)

What does Non-QM mean?
Non-QM stands for Non-Qualified Mortgage. It refers to loans that do not meet the Consumer Financial Protection Bureau’s (CFPB) guidelines for Qualified Mortgages. These loans give lenders flexibility to approve borrowers who may not fit the traditional income or credit profile.

Who should consider a Non-QM loan?
Non-QM loans are ideal for borrowers who are self-employed, rely on investment income, own multiple properties, or have strong assets but non-traditional income. They can also help those with past credit challenges who are now financially stable.

Do Non-QM loans require a higher down payment?
In many cases, yes. Because Non-QM loans involve more customized underwriting, lenders may ask for a larger down payment or a higher credit score to offset potential risk. The exact amount varies by program and borrower profile.

Are Non-QM loans risky?
Non-QM loans are not considered high-risk when managed properly. They follow responsible lending standards, including verifying a borrower’s ability to repay, just with more flexible documentation. Working with a reputable lender, such as First Heritage Mortgage, ensures these loans remain safe and transparent.

Can I refinance with a Non-QM loan?
Yes. Many Non-QM loan programs allow refinances, including cash-out refinances. Borrowers often use them to access equity, lower payments, or restructure financing when a traditional loan does not fit their current financial situation.

Can I switch from a Non-QM loan to a conventional loan later?
Yes. Borrowers can often refinance into a Qualified Mortgage after improving their credit, income documentation, or overall financial profile. This strategy can help lower rates and long-term costs once eligibility improves.

In summary, Non-QM loans can make homeownership possible for borrowers with unique financial situations. 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.