What Is a Non-Qualified Mortgage?


One of the primary benefits of a non-QM loan is that it allows buyers with low credit scores to purchase a home. They require less proof of income for people who are self-employed, run their own businesses, or work non-traditional jobs. Non-QMs are also almost as easy to apply for as a traditional loan.

Should I get a non-qualified mortgage?

A non-QM is a good idea when you have the income to make regular, on-time mortgage payments, but cannot get a qualifying mortgage.

Imagine that you own a contracting business. Some months, your income is high and others, only a little goes into your bank account. You have no way of knowing exactly how much you will earn from year to year. But you don’t have trouble paying your bills, your credit score is high, and you have money in the bank. Even though your finances are healthy, you cannot tick the “income verification” box required for a qualified mortgage. That’s where a non-QM comes in.

The type of borrower who might benefit from a non-QM loan includes:

  • Retiree
  • Self-employed
  • Real estate investor
  • Business owner
  • Foreign national
  • Buyer who lives off investments, or has high assets and low income
  • Buyer with a high debt-to-income ratio
  • Buyer with less-than-perfect credit

Non-QMs illustrate that mortgages are open to many types of homebuyers. You can get a mortgage with bad credit, or if your income is low, or if you have a high DTI.

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If you’re concerned about whether a non-QM is safe, it’s good to know that they are not the same as subprime mortgages. The Great Recession housing meltdown has lead to a misconception that non-QMs are bad loans. However, like qualified mortgages, today’s non-QMs have their own set of guidelines. In fact, the lending process is similar, apart from the loan documents required. Both loan types are subject to the “Ability to Repay Rule.” Unless a lender goes out of its way to determine that a borrower is able to repay the loan, they are open to lawsuits. A non-QM is as safe as any other mortgage on the market.

Where to find a non-qualified mortgage

  • Credit unions: A great mortgage loan may be as close as your nearest credit union, even if you can’t qualify for a traditional loan. Credit unions are authorized to issue non-qualified mortgages. They are less likely to want to sell your mortgage on and — as you’re a member-owner rather than just a customer — a credit union may be more willing to work with you if you don’t tick all the normal boxes. As long as you qualify to join (for example, some credit unions are for tradespeople only, while others serve specific communities), a credit union offers a host of benefits.
  • Mortgage lenders for bad credit: If it’s your credit score holding you back, there are mortgage lenders who routinely work with people with credit scores in the high 500s. You can expect to pay more in interest and fees than you would with a qualifying mortgage, but it may open the door to homeownership.
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Alternative to a non-qualified mortgage

If your credit score is low or your income is difficult to prove, you do have another option. Before you give up on buying a home, consider an owner financed property. If the situation that prevents you from obtaining a qualifying mortgage will pass in a few years (for example, a bankruptcy will fall off your credit report, or your DTI will be lower), consider looking for a home that the current owners are willing to finance. This is how it works: You agree on terms, like how long the owner will act as a lender and the interest rate you will pay. You make a down payment, but rather than making monthly payments to a mortgage lender, you pay the previous owners. Like a financial institution, the previous owner can repossess your home if you default on the loan.

Owner finance arrangements are not without risks. They normally include a “balloon payment,” due three to five years down the road. At that point, you apply for a traditional mortgage and use the funds to pay the previous owner in full. Once the previous owner is out of the picture, you make your monthly payments to the new lender.

If you’re looking for a non-QM loan, make it a point to rate-shop current mortgage rates until you find the perfect mortgage for you. Taking the time to find the right loan can save you thousands of dollars over time.

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View more information: https://www.fool.com/the-ascent/mortgages/what-non-qualified-mortgage/

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