In this article, we will cover what they are, the different types of non-QM loans, their pros and cons, and how to find the right one, depending on why you need it.
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A qualified mortgage loan is one that meets certain federal guidelines that are meant to prevent lenders from lending to unqualified borrowers. These guidelines were created after the subprime mortgage crisis of 2008, when banks provided subprime mortgages to individuals who then defaulted on their payments, causing a recession.
The Consumer Financial Protection Bureau (CFPB) imposes four primary rules for QM loans, which include:
For a qualified loan, the borrower's debt-to-income ratio can be 43% or lower, and the lender can charge 3% of the loan amount in origination fees. The CFPB also requires lenders to verify the borrower’s income to ensure they are capable of paying the loan balance.
The technical requirements of a qualified mortgage exclude many creditworthy Americans with a strong ability to repay their loans.
For instance, what happens when the self-employed contractor with multi-millions doesn’t qualify for a qualified mortgage because he doesn’t have the documentation needed? The guy with the ten-million-dollar net worth and perfect credit should be an ideal borrower, right?
In the last several years, lenders and the capital markets have started to serve these people and fill the gaps. Capital markets have gotten increasingly comfortable with non-QM mortgages, and lenders have gotten increasingly better at putting reasonable processes into place to determine the borrower’s ability to repay.
Both qualified mortgages and non-qualified mortgages can be divided into two categories: consumer purpose loans and business purpose loans. Most loans backed by the federal government are consumer loans, but there are some investment property QM loans.
Similarly, most non-QM loans are for investors, but there are some exceptions for owner occupiers. Some of this key criteria includes limiting risky features such as allowing for interest only payments, negative amortization, extended loan terms. or balloon payments. There are also stringent requirements on income and credit history verification.
To get a clearer picture, let's take a look at the different kinds of QM loans and non-QM loans
As we previously stated, qualified mortgage loans are loans that meet the guidelines set forth by the Consumer Financial Protection Bureau's criteria, which ensure a borrower’s ability to repay their loan.. There are many buckets of QA loans including FHA Loans, VA Loans, and conventional loans for investment properties.
These loans are designed for low-income borrowers and offer lower down payments and options for low credit scores.
These loans are designed to help veterans become homeowners and are backed by the U.S. Department of Veterans Affairs. VA loans are unique as they do not require a down payment. Similar to FHA loans, if one of the units is a primary residence for the borrower, they can rent the others out.
This type of mortgage loan is VA loans are unique as they do not require a down payment. Similarly to FHA loans, if one of the units is a primary residence for the borrower, they can rent the others out.
Non-QM mortgage loans, on the other hand, are home loans that fit outside the rules of a qualified mortgage. There are also many types of non-QM loans, such as jumbo loans, bank statement loans, foreign national loans, and more. It can also include investor loans, such as Visio's Rental360 Loan Program.
A jumbo loan is a loan that exceeds the limit established for Fannie and Freddie, which is $548,250 for 2021. Jumbo loan borrowers can be either owner occupiers, second home purchasers, or investors looking for a larger sum of money than the agency limit.
These loans are also known as self-employed mortgages or alternative documentation loans. To qualify for one, a borrower can use their personal and/or bank accounts to prove their income rather than W2s and tax returns.
In other words, bank statement loan lenders look carefully at a number of borrower bank statements. These loans are ideal for self-employed borrowers or contractors who do not meet agency requirements based on tax returns.
Fannie and Freddie do not offer loans to foreign nationals, but there are still loan programs for these individuals. Foreign national loan programs are designed for non-residents looking to purchase real estate in the United States.
An interest-only loan is a type of non-QM loan in which you pay only the interest for a given amount of time and then repay the entire loan amount at once. This is helpful for investors such as house flippers as it allows them to purchase a property and repay the loan in full once they sell it.
Investor loans are loans originated for property purchasers who are not owner occupiers and usually are underwritten based on the cash flow of the property rather than personal income.
Measuring the property's profitability rather than the borrower’s income enables investors to acquire multiple properties. It also simplifies the process by taking out the need to look at bank statements, pay stubs, or tax returns.
A conventional loan is a home loan that is not backed by the government. Like a conventional loan, a non-qualified mortgage is also one not backed by the government. However, conventional loans typically meet the guidelines of Fannie and Freddie, which are government sponsored entities.
When it comes to financing an investment property, qualified mortgages are the most affordable option with the lowest interest rates, yet they have strict guidelines in place. Investors just getting started, particularly those with high income, are drawn to QM loans. Newer investors are often able to document their income and meet the strict criteria set forth by Fannie Mae and Freddie Mac.
On the other hand, non-qualified mortgage investment loans meet the needs of professional investors with portfolios of rental properties. Non-QM loans are much easier to qualify for, despite the larger expense.
Not to mention, professional real estate investors are focused on building wealth over time and growing their monthly cash flow. In the big picture, the slightly higher investment property mortgage rates are outweighed by the significantly greater flexibility they have to achieve their larger investment goals.
A non-QM loan can make perfect sense for some investors, especially self-employed individuals who may not be able to qualify for a traditional loan. However, they have some downsides that borrowers must be aware of before signing on the dotted line.
The pros of a non-QM loan include:
The cons of non-QM loans include:
While it is possible to obtain agency financing for investment properties, the underwriting guidelines can be restrictive.
Experienced investors with multiple mortgaged investment properties and self-employed professionals without W2s often have difficulty meeting personal income requirements. Non-QM investor loans also have lower documentation requirements than traditional qualified mortgages.
Many experienced investors prefer to borrow through an LLC or corporation to protect their identity and other investments. Fannie Mae or Freddie Mac loans can only be obtained in an individual(s) name.
Even if you have enough personal income to support multiple mortgages, with federal government sponsored loans, you are maxed out at ten loans. Non-QM lenders do not have a limit offering investors the opportunity to grow their portfolios before other investments are fully paid off.
There are many non-QM investment mortgage lenders on the market, and determining which one is the best for you can be overwhelming. We always recommend consulting a financial advisor. In the meantime, here are some questions to consider.
While this may sound like a given, it is important to know exactly what your costs will be for the loan. The last thing you want is to end up at the closing table with unexpected costs. Make sure you have a clear picture of any underwriting fees, legal fees, and any possible factors that could adjust your rate.
Different non-QM lenders allow for different properties. For example, some non-QM lenders do not allow non-warrantable condos, boarding houses, or multi-family homes. Lenders also have different requirements and programs for property condition.
Lenders who work with investors regularly typically have the optionality to meet your investment strategy. For instance, Visio has prepayment penalty and rate buy-downs as well as a selection of rate structures including interest only loans, to provide investors the flexibility they need.
Visio is a leading provider of non-QM mortgage products. Our Rental360 is underwritten based on rental income and borrower credit history, rather than the borrower’s personal income. As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of properties.