Remember that the government does not back non-QM loans to any degree. If you default on a non-QM loan, you can’t just turn around and claim your lender took advantage of your financial situation. You should expect to pay a significantly higher interest rate on these types of mortgages than on other home loans.Īlso, be aware that you won’t enjoy the same level of regulatory protection that qualified mortgages offer. Many lenders have steered away from subprime and non-qualified mortgages, but you can still find some financial institutions that offer non-QM loans on residential purchases.
NON QM LOANS VERIFICATION
Because non-QM loans come with more flexible financial verification processes, getting a mortgage going this route may be easier. If your income fluctuates significantly from month to month, you may be more resistant when trying to secure financing on a new home. Self-employed professionals, for instance, may have difficulty meeting lender requirements around income documentation. Although that sounds bad - and to be sure, many people would be better served with a qualified mortgage - there are some cases where it may make sense to take out a non-QM loan for a home purchase. Lenders that offer non-qualified mortgages aren’t responsible for verifying income, reviewing existing debt, and conducting other probing financial checks. In some ways, non-QM loans are the new subprime mortgage, just with a new name. This rule essentially divides home loans into two broad categories: qualified mortgages and non-qualified mortgages. That includes checking bank statements, employment status, revolving debt, etc. The CFPB, in turn, established rules to prevent consumers from taking out mortgages they can’t afford.Ĭhief among those guidelines: is the Ability-to-Repay/Qualified Mortgage Rule (ATR/QM Rule), which states that lenders must make a “good faith determination” about a borrower’s ability to repay a loan before extending a residential mortgage.
In particular, the Frank-Dodd Act led to the creation of the CFPB. In the aftermath of that crisis, Congress enacted sweeping changes to various industries that played a role in that financial crisis, including mortgage lending. Non-QM Loans After the 2008 Housing Crisis While subprime loans were by no means the primary cause of the 2008 housing crisis, they certainly played a notable role. Subprime borrowers often found they couldn’t afford to keep up with their monthly mortgage payments, resulting in defaults and foreclosures. The catch? Subprime loans had higher interest rates, so lenders could increase profit while also extending loans to a broader range of potential homeowners. Homeowners who didn’t meet that criteria - and, as such, were at a higher risk for default - were extended “subprime” mortgages. Borrowers with strong credit scores, manageable debt, and reliable income received “prime” mortgages. A better rating meant a greater likelihood of repayment, which meant less risk for the lender. Lenders would then rate applicants on their perceived ability to repay the loan amount. In order to approve these types of mortgages, lenders would attach higher interest rates to their loans. Before the Great Recession, mortgage lenders had far more flexibility to extend home loans to people with less desirable qualifications - think low credit scores, high levels of debt, and sometimes even nonexistent income. To understand non-QM loans, first, we’ll need to go over a quick history lesson. But, because those CFPB rules do not burden non-QM loans, lenders can offer more flexible income requirements while setting higher interest rates to offset the added risk. The CFPB does not protect homebuyers who use non-qualified mortgages. If you think that sounds risky, you are absolutely right. In this case, “good faith determination” usually refers to checking W2 forms, pay stubs, bank statements, and other documents verifying you make enough money to pay back your home loan. QM Rebuttable Presumption: APR > APOR + 1.50%, but ≤ 2.25%Īvoiding those agency-standard documentation requirements means lenders do not need to make a good faith determination on the borrower’s ability to repay a non-QM loan.
Non-QM loans may also exceed the CFPB’s current price-based thresholds: Non-QM loans may encapsulate a wide variety of mortgages, including: NON-QM LOAN DEFINITIONĪ non-qualified mortgage - or non-QM - is a home loan not required to meet agency-standard documentation requirements outlined by the Consumer Financial Protection Bureau (CFPB). Non-QM Loans: What is a Non-Qualified Mortgage?ĭepending on the type of mortgage you're interested in and the specific loan terms you're looking for, a non-qualified mortgage may be a good fit.
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