The Relevance of Non-QM Loans

Written by Posted On Monday, 09 November 2020 05:00

To understand the importance of non-QM lending, we first need to be clear on exactly what a QM is. QM stands for ‘Qualified Mortgage’ and is a type of home loan that meets certain specific standards. When someone finances a home with a QM loan, there are some inherent consumer protections when compared to other types of loans. 

If a loan meets these standards, lenders are protected against any future lawsuits from legal challenges from borrowers during foreclosure proceedings and other financing-related actions.  A QM loan cannot have points and fees more than 3% of the loan amount. There are no ‘interest only’ loan features, where the borrowers have the choice of paying just the interest each month and the term of the loan cannot exceed 30 years.

A non-QM loan is simply one that does not mee QM status. But that doesn’t mean non-QM loans are a bad thing…they’re not. They’re just in a different category. For example, let’s say someone is self-employed and doesn’t get a regular monthly paycheck on the 1st and 15th. Instead, income is received on a more sporadic basis when customers pay their bills. 

A non-QM loan program such as a ‘bank statement’ loan can be an answer. A bank statement loan is one where income is derived by reviewing personal and business bank statements. By looking at various deposits over the previous 12 months, lenders can arrive at a qualifying income amount by averaging those deposits. This is a non-QM loan.

Another type of non-QM loan is an interest-only loan. As the name implies, consumers have the option of paying just the interest on the loan, interest plus principal or an interest plus a partial payment toward the outstanding loan balance. 

The Ability to Repay rule, or ATR, is a guideline whereby lenders determine affordability by arriving at an acceptable amount of monthly debt compared to gross monthly income. This comparison comes in the form of a debt ratio. A loan can fall into the QM category as long as this ratio does not exceed 43, or 43% of gross monthly income. But getting someone approved with a higher debt ratio, even as high as 50 with a non-QM mortgage, can be achieved with a non-QM mortgage.

Non-QM loans can have a balloon payment. A balloon payment is one where after a predetermined period of time has elapsed, the entire loan balance comes due. In return, borrowers can get a lower than market rate during the initial fixed period. A 5/1 adjustable rate mortgage featuring a balloon payment after five years is a non-QM loan. 

This can be an attractive option for those seeking a lower interest rate knowing that in five years or less, the property will be sold or the mortgage otherwise retired. And slowly coming back into the market are ‘stated’ or ‘no doc’ loans. These loans have limited documentation requirements as it relates to income, employment or assets.

One final note, non-QM loans are not directly correlated with so-called ‘sub prime’ mortgages, where applicants with damaged credit and low credit scores can find financing. While non-QM loan programs may feature lower qualifying credit scores, most want to see a minimum credit score of at least 620.

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David Reed

David Reed (Austin, TX) is the author of Mortgages 101, Mortgage Confidential, Your Successful Career as a Mortgage Broker , The Real Estate Investor's Guide to Financing, Your Guide to VA Loans and Decoding the New Mortgage Market. As a Senior Loan Officer and Mortgage Executive he closed more than 2,000 mortgage loans over the course of more than 20 years in commercial and residential mortgage lending. 

He has appeared on CNN, CNBC, Fox Business, Fox and Friends and the Today In New York show. His advice has appeared in the New York Times, Parade Magazine, Washington Post and Kiplinger's as well as in newspapers and magazines throughout the country. 

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