Understanding a Non-Qualified Mortgage: What You Need to Know

Mortgages can be a confusing and exhausting process for anyone, especially those who are entering the market for the first time. One of the most important considerations to make is what type of mortgage you should take out. There are two main types: qualified mortgages (QMs) and non-qualified mortgages (non-QMs). But what exactly is the difference between these two?   

A non-qualified mortgage (non-QM) is a type of mortgage that does not meet the standards set forth by the Consumer Financial Protection Bureau’s (CFPB) ability-to-repay rule. Non-QM loans are designed for borrowers who may have a higher debt-to-income ratio, a lower credit score, or a limited credit history.  

Non-QM loans can be either fixed-rate or adjustable-rate mortgages (ARMs). They are most commonly available in 15- and 30-year terms. The interest rates on non-QM loans are generally higher than traditional conforming loans because they are looked at as a higher risk to lenders.  

There are several different types of non-QM loans available, each with its own set of eligibility requirements:   

• No Doc mortgage. A no-documentation loan does not require borrowers to prove their income or assets in order to qualify for the loan.   

• Alt Doc mortgage. An alternative documentation loan allows borrowers to use nontraditional methods to verify their income and assets. This could include bank statements, tax returns, and pay stubs.   

• Foreign national mortgage. This one is designed for borrowers who are not U.S. citizens but have legal residency in the country.   

• Jumbo mortgage. This is a type of loan that exceeds the maximum amount allowed by Fannie Mae and Freddie Mac guidelines.   

What is a Non-Qualified Mortgage?

A non-qualified mortgage by definition is a collection of all those mortgages that do not follow conventional standards that the CFPB has set. These loans are designed for borrowers who will likely experience many difficulties to get a traditional mortgage, or who may have non-traditional income sources that are harder to verify. And in case your income or credit history falls outside the stringent guidelines set by standard mortgage loan programs, these loans may be worth considering.  

They also come in a variety of loan terms, including 15-, 20-, 25-, and 30-year terms. Additionally, some non-qualified mortgage lenders allow for interest-only payments during the initial years of the loan, which can lower monthly payments during that time. 

Who Can Qualify for Non-Qualified Mortgages?

There are a few different types of non-qualified mortgages, but generally, these loans are for borrowers who don’t fit into the “qualified mortgage” category. This might be because they have higher incomes or debts, or because they want to buy a more expensive home than what’s allowed under qualified mortgage guidelines. Lastly, even borrowers with recent bad credit or those who are investing in multiple rental units can qualify.  

Non-qualified mortgages can be harder to find than qualified mortgages, and they often come with higher interest rates and more flexible terms. But if you can’t secure a qualified mortgage, a non-qualified one might be the best option for you to get the home of your dreams.

Who Offers Non-Qualified Mortgages?

There are a number of lenders who offer non-qualified mortgages, including some traditional banks and credit unions. There are also a number of online lenders and private money lenders who offer this type of financing.   

The terms and conditions of these loans will vary depending on the lender, but they typically require a higher down payment and may have higher interest rates and fees. This is why it is crucial to take your time and research different lenders and their offers. Don’t get rushed into signing a loan deal that is not favorable for you.

How Do Qualified and Non-Qualified Mortgages Differ?

The main difference between a qualified mortgage and a non-qualified mortgage is that a qualified mortgage is backed by the government, while a non-qualified mortgage is not. So, this means that non-QM loans are not insured, guaranteed, or backed by FHA, VA, Fannie Mae, or Freddie Mac.  

Qualified mortgages are also subject to stricter rules and regulations, which are designed to protect borrowers. Non-qualified mortgages may be more expensive and risky, but they can also offer borrowers more flexibility. On average, these loans have a 1.25% higher interest rate than QM loans. 

Pros and Cons of Non-Qualified Mortgages

Now that you understand what a non-qualified mortgage is, it’s time to look into some of the pros and cons of getting this loan.   

On the plus side, the non-qualifying mortgage will allow you to get a bigger loan. This can be great especially if you dream of purchasing a more expensive home. Also, your debt-to-income ratio does not need to be under 43% as it is usually required with qualified mortgages.  

On the downside, you will need to pay a higher interest rate if you decide to take out this type of mortgage. While this may not seem like a big deal to you right now, keep in mind that you will be paying this loan for a long time and this interest will add up.  

Pros  

• You may be able to put down less money upfront. This could be helpful if you don’t have a lot of savings or if you want to use your savings for other purposes.  
• This is a great option for borrowers who are self-employed, have a volatile income or have difficulty documenting their income.  
• There is a lower credit score requirement.  
• Even borrowers with recent bad history can qualify.  
• Flexible terms including long repayment periods and interest-only payments.  
• Higher DTIs allowed.  

Cons  

There are several potential cons to taking out a non-qualified mortgage, as opposed to a qualified mortgage.   

• They come with higher interest rates than qualified mortgages. This is because lenders view them as being riskier. After all, the borrower may not have the income or employment stability necessary to make repayments on time.  
• More difficult to refinance the loan down the line.   
• They come with higher costs for originating the loan.  
• Not as widely available as qualified mortgages.  

Are Non-Qualified Mortgages More Expensive Than Traditional Mortgages?

There are a few key ways that non-qualified mortgages (NQMs) differ from qualified mortgages (QMs). One of the most significant ways is in terms of cost. Generally speaking, NQMs tend to be more expensive than traditional QMs. This is because NQMs usually involve higher interest rates and fees. Additionally, NQMs typically have stricter underwriting standards, which can lead to higher costs for borrowers who don’t meet all of the requirements.  

For example, let’s say you’re looking at two 30-year fixed-rate mortgage products – one QM and one NQM. The QM might have an interest rate of 4%, while the NQM could have an interest rate of 5%. In this case, the monthly payment on the NQM would be about $50 higher than the payment on the QM.  

So, yes, the non-qualified mortgage will be more expensive but it may also be the only option for borrowers with less-than-perfect credit or who don’t fit into the “average” borrower profile.

Final Thoughts

When deciding if a non-qualified mortgage is a right fit for you, it’s important to compare it against a qualified mortgage. Both have their own set of pros and cons that you should take into consideration.  

While non-qualified mortgages don’t have all of the same benefits as qualified ones, they can still be a good option for some borrowers. In this article, we gave you some of the most common examples of non-qualified mortgage types but it’s on you to decide if their pros outweigh the cons.  

Keep in mind that they also may be a lot easier to qualify for if you have less-than-perfect credit or income.