Worried that lenders won't approve you for a mortgage because of an iffy credit score or an irregular income stream? You might be a candidate for a non-qualified mortgage, a loan tailored to consumers considered riskier borrowers by lenders.
A non-qualified mortgage loan, also known as a non-QM loan, is also an option for borrowers interested in more exotic loan types, including interest-only mortgages and loans with longer terms.
According to the Origination Solutions Survey from Altisource Portfolio Solutions, the volume of non-QM loans is on the rise, with the company predicting that the dollar volume of these loans will rise by 400 percent this year.
Is a non-QM loan right for you? Lenders say it could be, if you do your research, can afford the sometimes higher monthly payments that come with these loans and understand the riskier features of these products.
Non-QM loans on the rise
Chuck Matthewson, senior mortgage consultant for Charlotte, North Carolina-based lender LowRates.com, said that he expects more borrowers to consider non-QM loans in the future. These loans are a good option for borrowers who don't have perfect credit or have the inconsistent income streams that make lenders nervous.
"There are millions of people in the United States who can't get a mortgage because they don't fall within the standard guidelines because of some type of credit event or having to prove their income," Matthewson said. "However, they can afford a mortgage and have the necessary assets."
Non-QM loans are also good for borrowers who might be interested in a riskier loan type. Consider interest-only mortgages. In these loans, borrowers only make interest payments for a set number of years, leaving the mortgage’s principal balance untouched.
These loans are considered riskier. But there are some buyers – those who plan to move after a short period of time or those who expect to earn a significantly higher salary in the next few years – who might benefit from interest-only mortgage rates and monthly payments that come with these products. These loans, because of the risk that comes with not reducing a mortgage’s principal balance, are only available as non-QM loans.
What exactly is a non-QM loan?
A non-QM loan is, at its most basic, a mortgage loan that doesn't meet the standards spelled out in the Qualified Mortgage rule adopted by the Consumer Financial Protection Bureau in 2014. For a loan to be classified as a Qualified Mortgage, lenders must first document borrowers' income, employment status, credit, debts and assets to make sure that these borrowers can afford to repay their mortgage.
A Qualified Mortgage is a rather vanilla one, too, such as standard fixed-rate or adjustable-rate loans. A loan can't be considered a Qualified Mortgage if it comes with riskier features such as interest-only payments or a large balloon payment that is due after a set number of years.
Lenders can still originate mortgage loans for consumers with income streams that are hard to document or those who have credit blemishes. They can also originate riskier mortgage types. These loans are considered non-QM loans.
For instance, borrowers who are interested in interest-only loans, in which their payments only go toward paying interest and not principal, will need to apply for a non-QM loan. Those who are interested in a negative amortization loan, in which their monthly payment is smaller than the interest accrued during that month, will also have to apply for non-QM loans. Even loans with longer terms, such as 40-year mortgages, are lumped in the non-QM category.
These loans are also an option for borrowers with high levels of debt or self-employed borrowers whose incomes might vary each month.
Pros and cons
Peter Grabel, managing director for Stamford, Connecticut-based Luxury Mortgage, said that his company introduced a suite of non-QM products about 12 months ago. The demand for these products has been strong, he said, and non-QM loans now represent a sizable portion of Grabel's volume.
"I have been amazed by the appetite for them," Grabel said.
Grabel said that the main benefit of these loans is that they provide a greater number of borrowers access to mortgages. Borrowers who don't have perfect credit; have past financial mistakes, such as a bankruptcy or loan that has gone into collection, on their credit reports; or who have income streams that soar one month and trickle out in others can qualify for non-QM loans, he said.
The non-QM loans offered by Luxury also require less documentation, Grabel said. They're not "no-doc" loans, in which borrowers don't have to verify any of their income or debts, but they usually don't require borrowers to submit copies of their tax returns or W2s.
These loans also close quickly, Grabel said, often in 30 days or less.
This doesn't mean, though, that non-QM loans don't come with any drawbacks. Grabel said that non-QM loans, because they are riskier, typically come with higher interest rates than do Qualified Mortgages. Grabel said that the non-QM loans offered by Luxury typically come with an interest rate of 5.5 percent to 6.5 percent.
Should these loans worry us?
Lenders say that a rise in non-QM loans isn't a bad thing. These loans aren't like the glut of subprime loans – bad credit mortgages made to borrowers with weak incomes or credit -- that flooded the market before the housing crash. That's because lenders when approving non-QM loans still must verify that their borrowers can afford their monthly payments, Matthewson said.
"These are not the same mortgages that were once called 'sub-prime,' where there was very little proving of the borrower's ability to repay," Matthewson said. "With non-QM loans, we have to prove their ability to repay, so the mitigated risk can be well-measured."
Taylor Stork, chief operating officer of Columbus, Ohio-based mortgage bank Developer's Mortgage Company, said that many of his clients with excellent credit struggle to obtain a Qualified Mortgage because their incomes are not as steady as those earned by salaried workers. Stork points to business owners, those working in the gig economy and tech employees whose compensation is largely based on stock options as examples.
Stork said that non-QM loans have been a positive for these borrowers.
"We are helping more buyers get approved and buy homes than ever before thanks to the emergence of non-QM loan products," Stork said. "Most of these options simply didn't exist a few years ago, which left a large swatch of people out in the cold for the last 10 years."