Non-QM loans or non-Qualified Mortgage loans are loans that do not follow the strict requirements of standard Fannie or Freddie Mac conventional loan requirements. This means they are easier for someone to get approved for a mortgage loan who might not have been able to qualify for a conventional loan. This might be an investor who has maxed out the number of conventional loans they can get or 1099 self-employed individuals who have a difficult time with underwriting all their income and taxes of their business.
For example, a type of non-QM loan is a DSCR Loan or Debt Service Coverage Ratio Loan. This type of loan is popular with investors because if they’re looking to buy an investment property the loan only cares that the borrower has a “decent credit score” and the property’s income that it generates can cover the “debt service” or “mortgage”.
Another type is a “Bank Statement Only Loan”. This one is useful for “self-employed individuals” who probably don’t show that they make a lot of profit on paper. However, by showing their bank statements where they have a lot of income regularly coming in. They’re able to get approved for a mortgage.
Sounds great! Now, what’s the catch for non-QM loans?
The interest rate can be anywhere from 1% to 3% higher than normal loans. Also, the minimum down payment required can be 20% to 25% down and they’ll charge you 2 to 3 points for the origination fee. Also, the underwriting progress can be a nightmare. It really depends on the investor who is issuing the non-QM loan and how stringent they are on the underwriting. So your mileage may vary. Be careful to ask your loan officer about their relationship and experience with the investor who they’re getting the non-QM loan through. How many loans have they closed with this investor? How has the process been? Are they relaxed or strict on the underwriting? This can help save you from a lot of stress, losing earnest money, and wasting your time.