Non-QM Loan
A non-qualified mortgage (non-QM) is a home loan designed to help home buyers who can't meet the strict criteria of a qualifying mortgage. For example, if you are self-employed or don't have all the necessary documentation to qualify for a traditional mortgage, you might need to look at non-qualified mortgages.
The best way to understand a non-qualifying mortgage is to look at the criteria for traditional, qualifying mortgages. To qualify for a traditional mortgage, you must meet these requirements:
Income: You must have verifiable income, including pay stubs, W-2s, and tax returns.
Debt: Your debt-to-income ratio (DTI) must be 43% or less. This is the amount of your monthly income that goes toward your existing debts.
Limits on fees: Points and fees on your loan cannot exceed 3% of the loan amount.
No risky loan features: Risky features include interest-only loans (where you only pay interest without reducing the principal), negative amortization (where your principal can increase, even while you are making payments), or balloon payments (where a larger payment can be tacked on to the end of the loan).
Loan term: The loan term must be 30 years or less.
If you can't tick all of the above boxes, you'll need to look into non-qualifying mortgages.
Essentially, mortgage lenders need to know you have the ability to repay your loan. The above regulations also protect buyers from risky loans. These minimum standards for qualified mortgages are part of the 2010 Consumer Protection Act and Dodd-Frank Wall Street Reform Act.
Why do these regulations exist? In the years leading up to the Great Recession, lenders seemed willing to approve mortgages for anyone with a pulse, including those with poor credit and low down payments. Some mortgages did not verify income at all. Unethical lenders would crowbar home buyers into mortgages that were unaffordable. This willy-nilly approach was one of the reasons the recession hit with such ferocity. Millions of people who had home loans could not afford the payments.
Today, as long as lenders follow these strict lending guidelines, they are protected from liability. Borrowers cannot come back (as many did during the Great Recession) and claim that a lender knew they could not make the monthly payments.
Non-qualified mortgages are not backed by government agencies like FHA, VA, Fannie Mae, and Freddie Mac.