The term “Non-Qualifying Mortgage” or Non-QM can sound intimidating. At its most basic level, a Non-QM loan is a loan that does not meet the standards set forth in regulatory reform imposed after the 2008 housing crisis. Below we take a closer look at what this really means in terms of risks and benefits for both consumers and lenders.
In 2014, the Consumer Financial Protection Bureau (CFPB) adopted new regulations that defined Qualifying Mortgages (QM). This provided mortgage lenders and banks with protection on loans that meet QM standards, to reduce risk with fewer buybacks or claims resulting in monetary losses. In addition, the CFPB imposed the Ability to Repay (ATR) minimum standards, which take into consideration a variety of income related topics found in Appendix Q. After these regulations were adopted, loans that didn’t adhere to QM standards were deemed non-QM loans. All loans, even non-QM loans, must adhere to certain ATR requirements.
Are Non-QM loans considered “high risk?”
Not necessarily. Non-QM loans simply mean that the loans don’t fit into the complex rules associated with the QM definition. In fact, most Non-QM loans are generally built to offset potential risks, such as requiring borrowers to have higher reserve requirements and higher FICO scores.
What loan characteristics are considered Non-QM?
Non-QM loans can have stated income, which does not qualify as “fully documented” in income underwriting protocol for Qualifying Mortgages. If you can’t provide a fully documented history and proof of income, you may fall under the Non-QM umbrella – even if you have great credit, assets and employment history.
Interest-only loans, although popular, are not considered Qualifying Mortgages.
High Debt-to-Income Ratios
Jumbo loans that exceed a 43% DTI are most likely considered non-qualifying. Exceptions include loans backed by Fannie Mae and Freddie Mac, or loans insured by the FHA, VA or USDA.
40 Year Loan Term
Under the QM definition, any loans that extend passed a 30 year term are considered Non-QM.
There are a variety of lending products available to potential homebuyers today that fit both within the QM and Non-QM threshold. Contact an experienced loan advisor today to discuss your lending options and financial goals.