If you have lackluster income and credit history making it difficult to qualify for standard mortgage loan programs, don't give up your dream of owning a home quite yet. A non-qualified mortgage loan (non-QM) may be just the solution you're looking for. But, do you know what a non-QM mortgage loan is? If not, no worries, we'll tell you everything you need to know.
The best way to understand a non-QM loan is first to find out what it isn't. We'll explain. To qualify for a conventional mortgage, applicants must meet two primary requirements.
- Income: You must be able to prove your income with W-2s, pay stubs, and tax returns.
- Debt: Generally, your debt-to-income ratio must be no higher than 43 percent.
A non-QM loan may be your best bet if you can't meet these requirements. Why? Non-QM lenders offer:
- Interest-only payments: You may not be required to pay any of your loan balance and instead pay the accruing monthly interest.
- Negative amortization: This non-QM loan is quite rare, but it allows lendees to make payments for less than the monthly interest. Over time, your loan balance grows, hence the name "negative amortization."
- Balloon payments: A balloon payment means you'll make a large payment at a predetermined time. You may be forced to forfeit your mortgage if you cannot produce the payment.
- Unconventional loan terms: Most conventional loans have 15 to 30-year loan terms. Non-QMs may have periods exceeding 30 years.
What’s the Incentive for Lenders to Offer Non-QM Loans?
Non-QM lenders may have less stringent application requirements, but greater flexibility comes with greater risk. That's why non-QM lendees pay higher rates, APRs, and upfront fees than those who qualify for a conventional mortgage.
So what are the Pros and Cons of a Non-QM Loan?
- Most non-QMs require you to verify your income. If you cannot produce W2s, paystubs, or tax returns, non-QM lenders may qualify your income using bank statements instead. This is useful for gig and contract workers who do not receive W2s or bi-weekly paystubs.
- Non-QM loans are not required to meet federal or Consumer Financial Protection Bureau qualifications, which means that applicants with credit scores as low as 660 may still qualify.
- Another benefit of a non-QM loan is that investors do not limit the number of financed properties you own.
- Higher down payment requirements—as much as 20 percent
- Higher interest rates and more fees than conventional loans
- Increased chances of defaulting on your loan
Where Do I Apply for a Non-QM Loan?
Credit unions are a good source for non-QM loans for several reasons. First, credit unions are less likely to resell your mortgage. Second, credit unions require you to be a member, so they may be more willing to work with your weak credit scores or missing W2s.
In addition to credit unions, many mortgage lenders specialize in helping those with bad credit. Some lenders work with people with credit scores in the high 500s. The catch, of course, is that you'll pay higher interest rates and fees than those who qualify for a conventional loan.
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