Non-Qualified Mortgages: The Good, The Bad and The Ugly

What is a non-qualified mortgage (non-QM)? This is a home loan that is not required to meet agency standard documentation requirements as outlined by the Consumer Financial Protection Bureau (CFPB).

To understand what a non-QM loan is, we need to look back prior to the Mortgage Melt Down back in 2008.  Many remember this as the “Great Recession.”  At that time, lenders were eager to lend to a wide variety of financial profile borrowers that included low credit scores, high levels of debt and sometimes nonexistent income.   In return for funding these types of mortgages, lenders would attach higher interest rates, more fees and pre-payment penalties for these types of mortgages.  These loans were referred to as “sub-prime” loans.  Borrowers with strong credit profiles received more attractive financing and those loans were called “prime” loans.

After the Housing Crisis of 2008, Congress enacted massive changes to a wide variety of industries, and specifically the home loan industry.  In particular, the Dodd-Frank act led to the creation of the CFPB which established rules to prevent customers from taking out mortgages that they couldn’t afford.

Within these new guidelines, the Ability-to-repay/Qualified Mortgage Rule (ATR/QM Rule) was created.  This new guideline mandated that lenders must make a “good faith determination” about a borrower’s ability to repay a loan before extending a residential mortgage. To receive government financial protection, lenders must abide by these rules which include reviewing documentable income, assets and credit. 

Non-QM loans, loans that do not meet these ATR/QM Rules, offer flexibility for borrowers that are challenged to meet the standard guidelines of Qualified Mortgages.  If your income fluctuates significantly from month to month, or you are self employed and you take advantage of writing off many of your business expenses, these non-QM loans may be your ticket to home ownership. The interest are likely to be a bit higher than conventional QM loans, however they do provide borrowers the ability to buy now. 

Who benefits from non-QM mortgages?

  • People who are unable to provide sufficient documentation regarding their finances and employment (Self-employed, contract workers, freelancers, small business owners, etc.)
  • People with challenged credit scores
  • People with high debt to income ratios.

In summary, there are tradeoffs to consider when deciding to proceed with a non-QM loan.  The ease of qualifying for a non-QM loan for many borrowers is attractive and perhaps the only viable option. This, however, may come at the expense of a higher interest rate and reduced levels of borrower protection.  Always consult a mortgage expert who can help you weigh the risks against the rewards before making a final move.  The StreicherTeam is here to help you navigate through this process to ensure that you can make a solid and confident financing decision.