Non-QM Loans 

A Non-Qualified Mortgage, or a “non-QM” loan, is a specific mortgage type that could be the right fit for many borrowers. The first step to deciding if a non-QM mortgage is right for you is knowing what exactly a non-QM mortgage is. Many borrowers hear the term “non-qualified” and assume the worst - but a non-QM isn’t a denial and knowing the facts about this type of mortgage could help many aspiring homeowners find a shorter route to realizing that goal.

Non-qualified mortgages are accepted all the time but have less strict guidelines for the borrower. A Non-QM loan is a flexible branch of mortgage loan types, usually for a specific type of borrower. 

In this blog, we will be talking about what Non-QM loans are, the types of Non-QM loan products, the differences between QM and Non-QM, and why the benefits of Non-QM loans matter to you. 

 

 

History

Since the crash of 2008, National Mortgage regulators like The Consumer Financial Protection Bureau (CFPB) have enforced something called the Ability To Repay rule. This rule is created so financial experts have certain criteria, QM or Non-QM, that need to be followed so the borrower can pay the loan back.

These QM loans, like Conventional, FHA, VA, and USDA, follow certain rules so they are ‘qualified’ to be bought and sold under their government securities on the secondary market.

To go a bit deeper, QM loans are bought by big players in the secondary market, namely Fannie Mae, Freddie Mac, and Ginnie Mae– the bosses of the government-sponsored enterprises. They have guidelines and loan limits which are assessed when they sell and buy these loans. For them to do this, they need to have across-the-board standards for income, assets, employment, credit, and other calculation and verification methods. 

Non-QM Loans aren’t sold alongside Conventional, FHA, VA, and USDA loans, but are sold between other lenders. Non-QM loans have more flexibility when it comes to qualifying, but they still follow certain rules to show that the borrower, however unique, can still pay their loan back. For example, a borrower may have great credit, but their source of income doesn't meet the key and rules to get a conventional or FHA loan, so they are categorized as a Non-QM Loan.

This is important to understand, because at X2 Mortgage, we come across many unique borrower financial situations, and understand what it takes for EVERYONE to be able to buy property. You may fall into a Non-QM category and have mistakenly been told/thought you weren't able to buy, so keep reading. 

 

 

 Types of Non-QM Loan Products

There are many different types of non-QM products, and if you can think of one, X2 Mortgage can do it. Below are some of the top non-QM loan Products that we come across regularly, but please feel free to ask about any others you hear. 

 

Interest-Only Loans

Interest-Only Loans are loans that let a borrower pay lower payments for a while, usually 5-10 years.  You don't have to pay down the principal amount, just the interest on your loan, which allows flexibility to manage your cash flow and puts you in the driver's seat of how fast you want to pay down your loan. 

However, it's important to note that you don't gain any equity during the interest-only period, because your principal isn't going down. This is considered a risky loan, and can be costly–there are higher overall interest costs. After the 5-10 year period, you can either refinance, pay the remaining balance in full, or begin making interest/principal payments. Payments do get larger after the interest-only period ends. 

Who is this for? You may like an interest-only loan if you expect an increase in income within the near future, like a physician or lawyer, or through a trust for example. Real estate investors often use this loan, as they use their extra cash to build their portfolio and pay off the loan quickly. 

 

Bank Statement Loans

Bank statement loans are loans that are verified off an individual’s bank statements instead of traditional pay stubs or W-2s. While 12-24 months of bank statements are required to prove cash flow through personal or business accounts, they require a higher down payment (10-20%) and a DTI of 50%. 

Who is this for? These loans are usually sought after by different citizenship statuses or those with fluctuating incomes from non-traditional sources. Some examples include gig workers, freelancers, small business owners, and self-employed individuals. 

 

DSCR loans

Debt Service Coverage Ratio is a Non-Qm loan that uses a mathematical equation up front determining qualification. This loan is usually used on investment properties to determine whether they are going to generate enough income to cover the loan payment. The DSCR is calculated by dividing the property’s net operating income (NOI), or what they are by the total annual debt service (the interest and principal loan payments for the year). Do you have enough cash flow to repay your debts?

If the DSCR is greater than one, it's considered a good investment. If it's less than one, it's considered financially unhealthy for both lender and borrower. 

 

DSCR = Net Operating Income (NOI) / Total Annual Debt Payment.

For example, if a borrower is seeking to buy an investment property with an NOI of $40,000 and an annual mortgage payment of $30,000

The DSCR math equation: $40,000 (NOI) / $30,000 (Annual Debt Payment) = 1.33.

This means that the property generates 33% more money than is required to cover the annual mortgage payment. This is considered an excellent investment.

How do you determine the NOI? Take the Gross annual income-annual operating expenses. Annual operating expenses might include maintenance costs, property taxes, utilities, and an average annual vacancy rate. Another pro for investors? Lenders usually grant up to 3 million, which is a lot more than a QM loan!

Who is this for? Usually, investors or people who have long- or short-term rental properties on sites like AirBnB or VRBO. 

 

 

 Jumbo Loans

As of November 27th, 2024, the 2025 conforming loan limit (QM) is $806,500. This means that any loan limit greater than that is considered a jumbo or non-QM product. If you think about looking at this through a risk lens, the higher the loan amount, the higher the chance of risk of foreclosure. Consistent with all these Non-QM products, an increased down payment, a higher DTI limit, and a good credit score will stop the interest rate from increasing more than .25-1%. 

Who is this for? Anyone who can afford a Jumbo mortgage payment!

 

Chattel Loans

We are one of only four lenders in Arizona that do these loans - and it's a good thing we do. We have over 150 mobile home parks in the Phoenix Valley. Chattel loans are mobile homes on leased land. These loans usually come with a lot fee, and the interest rate is determined by downpayment and credit score. The good news is that primary homes and secondary homes are accepted here, and the loan amount is usually doable for many people. 

Who is this for? While a mobile home may not be the dream home to start for some people, it's always wise to buy somewhere! There are many mobile home parks that are family-oriented or 55 plus to meet everyone's needs. 

 

What property type falls under non-QM?

We have determined that certain loan products attract certain borrowers, but we can't forget that certain types of collateral need to be put under the Non-QM umbrella. These loans can be tricky, and not everyone does these types of loans.

 

Chattel loans (mobile homes on leased land)

Non-warrantable condos

Jumbo (loan amount over $806,500)

Investment properties or second homes

Building your own home

Land/Lot loans

Condotels 

 

Who would benefit from non-QM loans? 

There are more benefits to Non-QM loans, including flexibility in underwriting, and potentially higher loan amounts. Whether you’re an investor, a freelancer, a contractor, or anything that falls “outside the box” of traditional mortgage applications, X2 Mortgage will look at the full picture and help you find the right product for your unique situation.

Imagine a borrower, who does part-time freelance work writing social media posts for a company, and owns a full-time wedding photography business. She wants to buy her first home and get out of the renting game. 

When the borrower applies for her Non-QM loan, she has more flexibility in underwriting requirements: she switched social media companies but had consistent income on her bank statements. She was able to get a better rate because she had good credit, and was able to put money down. Her loan may be Non-QM, but with her bank statement loan, she is able to get her foot in the door in real estate, and out of renting. 

If you have thought before that you don't qualify for a loan, or your credit union has sent you elsewhere, we got you here at X2 Mortgage. We have successfully done Non-Qm loans for our borrowers in many unique and non-traditional situations, even when other lenders refused to consider them entirely.

If you need flexibility and the chance to be considered as more than the numbers on an application, give us a call. You still have a high chance of qualifying for a home. 

 

Risks and Considerations

Higher Interest Rates

When it comes to a mortgage loan, always look at it in terms of risk. According to the investors who are lending you the money, how risky is this loan for them? Non-QM loans are technically more risky and, therefore cost a little more. They usually have a baseline of .25-1.% higher interest rates than QM and a higher down payment cost. 

 

Potential for Negative Amortization

Watch for the potential for negative amortization. This is when your loan amount grows in time instead of shrinking. This can happen in interest-only loans, and construction, bridge,and interest-only jumbos. While this can be very tempting to have interest-only payments, you need to know your long-game plan or spending habits so you don't put yourself at risk. 

 

 

 

Non-QM Loans Rock

Non-QM loans present a valuable opportunity for a diverse range of borrowers who may not fit the traditional lending mold. With their flexible qualification criteria, these loans cater to individuals such as entrepreneurs, gig workers, investors, and borrowers with unconventional income sources. The ability to utilize alternative documentation, such as bank statements or asset verification, allows many to access financing that might otherwise be unavailable. While non-QM loans can involve higher interest rates and increased risk for lenders, they also provide the potential for larger loan amounts and tailored solutions that meet unique financial situations.

If you believe you may qualify for a Non-QM loan or have been previously turned away due to conventional lending guidelines, consider exploring this option further. Working with a knowledgeable lender like X2 Mortgage can help you navigate the complexities of non-QM products and find a solution that aligns with your financial goals. Whether you’re looking to purchase a home, invest in real estate, or explore alternative financing avenues, non-QM loans could be the key to unlocking your homeownership dreams. Don’t hesitate to reach out and discover how these flexible loan options can work for you.