- You Can Usually Qualify for a Non-QM Loan with a Lower Credit Score
Qualified mortgages must meet standards set forth in the Consumer Protection and Dodd-Frank Wall Street Reform Act. Non-qualified mortgages aren’t backed by federal programs, and therefore don’t have to meet those specific guidelines.
The minimum requirement for a non-qualified mortgage is usually around 100 points less than its qualified mortgage counterpart.
- Non-Qualified Loans Have More Options for Income Documentation than Qualified Mortgages
This is a key attribute that you’ve probably already heard if you’re looking into financing your home with a non-qualified mortgage. Qualified mortgages must meet regulations on income verification and debt ratios. Because of those provisions, self-employment and other types of non-W-2 income are not typically able to be accepted.
- Non-QM Lending Options Can Usually Accommodate Higher DTI Ratios
While other loans programs may mandate your debt-to-income ratio be under a certain percentage, non-qualified mortgages offer homebuyers flexibility within criteria set by the lender. Lenders will still make sure you can afford your bills, including your new mortgage, but since they are taking the financial risk in lending you the funds for your purchase, they can set their own requirements.
In general, lenders can accommodate DTIs with a few additional percentage points for non-qualified mortgage loans than they would be able to with qualified mortgage guidelines. Since each lender’s requirements for their non-qualified mortgage programs will vary, it’s best to work with your loan officer for specific requirements.
- Interest Rates and Fees May Be Higher with Non-QM Loans
There are many advantages we’ve covered about non-qualified mortgages. However, there are some potential disadvantages you’ll want to be aware of. The first is that while lenders can develop loan requirements outside of the federal requirements set for qualified mortgages, they also have flexibility in setting the fees they charge for non-qualified loans.
Since non-qualified loans aren’t backed by any government agencies and involve more risk for your lender, points, fees, and the interest rate tend to be higher. That being said, market forces and competition help keep these offerings within reason of other market rates.
- Not As Many Lenders Offer Non-Qualified Mortgages
While we’re covering this potential disadvantage last, it could be one of the first you encounter as you search for a lender to get a non-qualified loan from. Because of the financial risk involved in offering loans that aren’t backed by federal government programs, some lenders don’t offer non-qualified mortgages at all.
Don’t get discouraged, though. Many lenders do offer these loans, especially with the rise in self-employment, business ownership, and the gig economy. A quick online search will help you identify lenders that offer non-qualified mortgages and help you get started on your mortgage application process.