Looking for a loan but don’t know where to start? Have a non-traditional source of income and you’re not quite sure if you qualify for a typical loan? Perhaps you have had difficulty in the past getting approved for a mortgage and you’re exploring different options. Regardless, you’ll probably want to hear more about Qualified Mortgage (QM) loans and Non-Qualified (Non-QM) loans. This quick review will give you a better idea of what each type of loan has to offer.
What’s a Qualified Mortgage Loan?
QM loans provide certain legal protections to lenders once they are able to show that you have the ability to repay your loan. The stricter guidelines for QM loans were put into place to protect homeowners and to reduce the likelihood of defaulting on home loans.
Under these guidelines, risky mortgage loan features such as balloon payments and interest-only payments are no longer allowed. In addition to upfront points and fees being limited, the guidelines established how much of the borrower’s income can go toward their mortgage loan debt. In general, the borrower’s debt-to-income ratio for a QM loan must not exceed 43%. In addition, no loan term can exceed 30 years and no negative amortization can take place. (Negative amortization allows your loan principal to increase over time even though you’re making payments).
What’s a Non-Qualified Mortgage Loan?
Any loan that doesn’t meet all of the criteria of a QM loan is essentially a Non-QM loan. These types of non-traditional loans are ideal for borrowers who have fluctuating or lump sum incomes or who are self-employed as independent business owners, entrepreneurs, contractors, hospitality workers, retirees, actors, artists, musicians, etc.
Non-QM loan borrowers may have the income but don't necessarily qualify for a traditional mortgage with their tax returns, W-2s or pay stubs alone. Generally, Non-QM lending guidelines dictate that the lender must analyze the borrower’s Ability to Repay (ATR) through various terms such as reviewing cash flow of personal and business bank accounts. Non-QM loans are typically for borrowers with unique income qualifying circumstances, along with possible credit issues such as a bankruptcy, foreclosure, late payments or other isolated credit issues.
How They Differ
A significant difference between a QM loan and a Non-QM loan is that a Non-QM loan uses alternative methods of income verification (vs. the standard income methods of verification of a QM loan) to help the borrower get approved for a mortgage loan. Also, Non-QM loans are not insured, guaranteed or backed by FHA, VA, Fannie Mae or Freddie Mac. Also, a loan that meets QM requirements provides safe harbor for lenders against lawsuits from borrowers who default on their loan.
What Loan is Right for You?
It really comes down to which loan applies to your situation and meets your needs. A New American Funding loan officer can share a variety of mortgage loan options with you to help determine which loan is right for you. Contact us today to learn more!