Traditional mortgage loans, governed by renamed entities, often come with stringent requirements, leaving some potential homebuyers without viable options. In such cases, considering a nonqualified mortgage (non-QM) loan could be the key to unlocking homeownership. This post aims to provide insights into the world of non-traditional loan programs and their suitability for diverse financial situations.
Benefits of a Non-QM Loan:
Expanded Borrower Criteria:
According to CrossCountry Mortgage, Non-QM loans present opportunities for a broader spectrum of borrowers, including retirees, real estate investors, self-employed or gig workers, individuals with a high debt-to-income ratio, and those with credit history blemishes. If traditional loans prove elusive, a non-QM loan might be the solution to realizing your homeownership dreams.
Alternative Documentation:
Unlike traditional loans, non-QM loans allow for alternative income documentation beyond the standard W-2s, bank statements, pay stubs, and tax returns. This flexibility can be advantageous for borrowers with unique financial situations.
High-Interest Rates:
Since non-QM loans aren’t backed by entities like Fannie Mae, Freddie Mac, or government agencies, lenders assume more risk. Consequently, non-QM loans often carry higher interest rates compared to conventional mortgages. Prospective borrowers should be aware of this factor and assess its impact on monthly premiums.
Longer Loan Terms:
Bankrate.com points out that some non-QM loans come with loan periods exceeding the traditional 30 years. While this provides flexibility, it also means a more extended commitment and potentially higher overall costs for the homebuyer.
Eligibility Criteria for a Non-QM Loan:
Credit History:
Non-QM loans offer flexibility, with eligibility for borrowers with fair or poor credit scores. Some programs extend opportunities to those with credit scores as low as 580 or even 500, providing a lifeline to individuals with challenging credit histories.
Debt-to-Income Ratio:
Unlike traditional loans, non-QM loans can accommodate higher debt-to-income ratios, often exceeding the 43% limit. This makes homeownership possible for individuals with substantial debts that might otherwise disqualify them from traditional loans.
For The Consumer Financial Protection Bureau, Your debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income. This number is one-way lenders measure your ability to manage the monthly payments to repay the money you plan to borrow.
Common Types of Non-QM Loans:
Non-QM loans come in many forms. Here are some of the most common types of non-QM loans according to CrossCountry Mortgages
Bank Statement Loans:
These loans rely on reviewing bank statements, requiring as little as two months’ worth for some lenders. This alternative documentation can be advantageous for self-employed or gig workers with irregular income.
Investor Cash-Flow Loan:
Ideal for real estate investors, this type of loan uses rental income as the primary qualification metric, bypassing the need for traditional income statements and tax returns.
Asset Depletion Loans:
Allowing borrowers to use liquid assets as collateral, asset depletion loans offer an alternative to relying solely on day-to-day income for mortgage approval.
Recent Credit Event Loans:
Designed for individuals who have experienced recent credit events like foreclosures or bankruptcies, these loans provide opportunities for those overcoming financial hardships, albeit with potentially less favorable terms.
Final Takeaway:
Non-QM loans offer a diverse range of options for prospective homebuyers who do not meet the criteria for traditional mortgages. Understanding the benefits, eligibility criteria, and common types of non-QM loans can empower individuals to make the best decision on your homeownership journey.
- Disclaimer: The sample rates provided are for illustration purposes only and are not intended to provide mortgage or other financial advice specific to the circumstances of any individual and should not be relied upon in that regard. CrossCountry Mortgage, LLC cannot predict where rates will be in the future. The payment example does not include assessments. Actual payment obligations may be greater and may vary. Mortgage Insurance Premium (MIP) is required for all FHA loans and Private Mortgage Insurance (PMI) is required for all conventional loans where the LTV is greater than 80%. Rate(s), APR(s) and payment info is valid as of 12/14/2022 and assume a first lien position, 740 FICO score, 25-day rate lock, based on a single-family home. All terms are subject to change without notice. Loans are subject to underwriting guidelines and the applicant’s credit profiles, not all applicants will receive approval. Contact CrossCountry Mortgage, LLC for more information. Available for conventional, FHA, VA, and USDA loans only. Equal Housing Opportunity. All loans are subject to underwriting approval. Certain restrictions apply. ↩︎
- 2. Disclaimer: The information described was taken from the resource center of CrossCountry Mortgage LLC and Sean Hadley Personal NMLS265075 Branch NMLS1646021 Company NMLS3029
