Non-QM Loans: Understanding What They Are, and the Pros and Cons

In the hopes of getting more borrowers in the game, Non-QM Loans (Non-Qualified Mortgages) have grown significantly. QM Loans (Qualified Mortgage) are usually processed through a bank on an owner-occupied property. However, Non-QM Loans are a more desirable solution for real estate investors on an investment property. Non-QM loans are typically portfolio loans for private investors that do not conform to the strict government or conventional mortgage guidelines.

Mortgage lenders who utilize QM Loans (Fannie Mae, Freddie Mac, Jumbo, FHA, VA and USDA) must first qualify a mortgage borrower’s income, liabilities, and monthly debt payments to determine whether the borrower can successfully pay back the loan in the future. To successfully qualify for a QM Loan, real estate investors must fit the strict requirements set by the Consumer Financial Protection Bureau. This approval process requires borrowers to submit extensive documentation concerning their credit history, income, assets, and monthly debt payments—which usually takes well over a month to complete.

If you have an investment property that needs a quick turnaround without stringent guidelines, Non-QM loans may be better for you! Some of the Non-QM loans are Bank Statement Program, Fix and Flip Loans, Debt Service Rental Property (DSCR) and some Rehab or Construction Loans. To better understand the differences between QM and Non-QM Loans, let’s look at the pros and cons of each:

Pros of QM Loans

• Generally smaller down payments
• Interest rates lower because the loans are better documented
• More lenders are available because of government backing
• Some risky procedures are prohibited

Cons of QM Loans

• Document for self-employed borrowers can be prohibitive
• Credit requirements are stricter
• Investors are limited to ten properties
• Loans are not available to foreign investors

Pros of Non-QM Loans

• Alternative documentation is allowed
• Credit requirements not as strict and can take properties as an LLC
• Investors not limited to number of properties
• Product available to foreign nationals

Cons of Non-QM Loans

• Down payments are generally larger
• Interest rates and costs usually higher
• Risky features of loan might put borrower at more risk
• Non-QM products are harder to find

If you wish to find out more about these loans check with your loan officer or reach out to Rock Vaughan with Fidelity Direct Mortgage, today.

About the Author:

Rock Vaughan of Fidelity Direct Mortgage is a seasoned Mortgage Loan Officer with over thirty years of experience in the industry and is native to the Washington, DC metro area.

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