When most people think mortgage loans they’re thinking of the traditional, conforming loans that are based on strict guidelines that determine what income and how much of it can be used. Typically, proving you meet these ‘black-and-white’ criteria requires W-2’s and pay stubs, and occasionally tax returns. But what if a borrower is unable to satisfy these requirements? How are they able to finance a home loan? That’s where non-QM loans come in.  

In the aftermath of the Great Recession of 2008, the mortgage industry was forced to raise its standards and beef up its qualification requirements. Holding lenders to a higher standard is undoubtedly a positive thing, as it ensures borrowers can afford the loans they’re applying for. However, stricter guidelines also led to a large pool of people unable to qualify for QM loans, and thus excluded from a pathway to homeownership despite their ability to afford homes.

Who benefits from Non-QM loans?

The group that first comes to mind in discussions on non-QM loans is those with “dings” on their credit history, such as defaults, bankruptcies, and foreclosures, that remain on a credit report for years; these borrowers are able to take advantage of the more flexible underwriting guidelines for non-QM loan products. Another large group of borrowers that often get excluded from traditional, qualified mortgages is those borrowers with unique income situations, i.e. those that have difficulties either verifying their income or their employment. Self-employed individuals or gig workers tend to have a hard time documenting their income whether due to the length of their self-employment (QM loans typically require a 2-year history) or the manner of receiving their income.  These borrowers could benefit from a bank statement loan, which would allow them to provide bank statements only instead of W-2’s and/or pay stubs, potentially allowing them to qualify with their total income as opposed to only a portion. Non-QM loans also offer options for investors, allowing them to use the cash flow from the property they want to purchase without their employment or personal income, those without social security numbers, and those in need of lower initial payments.

Is there a downside to non-QM loans?

While these loans with their flexible guidelines seem like great options, there are some downsides to them as well. It is important to remember that these loans are, by definition, “riskier” for lenders so they typically come with higher interest rates and higher down payment requirements. Also, as niche products, it may take some more time to find a lender that offers a program right for you. There really is so much to learn about non-QM loans; this is just the tip of the iceberg. At the end of the day, make sure to do your research. United Atlantic Mortgage strives to find the right product for each and every borrower, offering the most competitive rates for both QM and non-QM loans. Are you a potential homebuyer who thought you couldn’t qualify due to a unique situation?  Give us a call today and let us try and help!

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