A non-QM loan is a mortgage that does not meet the strict Qualified Mortgage guidelines set by the Consumer Financial Protection Bureau. These loans offer more flexibility in underwriting but typically come with higher interest rates.
Non-QM loans serve borrowers who do not fit standard lending guidelines, including self-employed individuals, real estate investors, people with recent credit events, and foreign nationals.
If a standard QM loan does not work for your situation, a non-QM loan may provide the path to homeownership or investment you need.
What Makes a Loan Non-QM
A loan is non-QM if it fails one or more QM requirements, such as exceeding the 43% debt-to-income limit, having an interest-only period, including a balloon payment, or using alternative income verification methods. Non-QM loans also include those where points and fees exceed the 3% cap.
Who Non-QM Loans Serve
Self-employed borrowers who write off significant business expenses may show low taxable income but have strong cash flow. Investors with multiple properties may exceed DTIs. Borrowers with recent bankruptcy, foreclosure, or short sale may find non-QM lenders more flexible. Foreign nationals without US credit can also qualify.
Types of Non-QM Loans
Common types include bank statement loans (using 12-24 months of deposits), asset depletion loans (using assets to create income), interest-only loans, DSCR loans for investment properties, and loans for foreign nationals. Each uses non-standard underwriting.
Rates and Costs
Non-QM loans typically have interest rates 1% to 3% higher than comparable QM loans. Down payment requirements are also higher, often 20% to 30%. Closing costs may be similar, but some non-QM lenders charge higher origination fees to offset the additional risk.
Pros and Cons
Pros: flexible qualification, access for self-employed and investors, alternative income verification, faster closing for non-traditional borrowers. Cons: higher rates and fees, larger down payments, fewer lender options, less consumer protection than QM loans.
When to Consider Non-QM
Consider non-QM when you cannot document income through standard W-2s and tax returns, when your DTI exceeds QM limits but your cash flow is strong, or when you are an investor needing multiple financed properties. Always compare non-QM options with the possibility of improving your qualifying profile for a QM loan.