Non-QM loans interest rates are typically higher than those on qualified mortgages. The reason is that the lender is taking a risk by lending to a borrower who does not have traditional documentation of their income or a potentially damaged credit history. Non-qualified mortgage interest rates can vary depending on the amount of risk the lender is willing to take, so it is important to work with a lender who fully understands non-QM loans.
- Non-QM loan guidelines
Getting a Non-QM loan is a viable option for many consumers. These loans allow for more flexible underwriting requirements and income requirements. Applicants with a lower credit score may also qualify. However, non QM loans interest rates are typically higher than qualified mortgage rates. Lenders must make a good faith effort to verify the borrower’s capacity to repay the loan. This usually involves verifying income is some manner. Self-employed borrowers may also be required to provide alternative documentation to prove income.
- Higher debt to income (DTI) ratios than QM loans
Compared to qualified mortgage (QM) loans, non-QM loans allow for higher debt to income (DTI) ratios which can help borrowers qualify for a mortgage. Delinquency rates for non-QM loans are slightly higher than those of qualified mortgages. In addition to higher interest rates, non-QM loans have different qualification requirements than QM loans. Non-QM loans may have higher points and fees. These loans also offer flexible income requirements. Non-QM loans may also be eligible one day after bankruptcy.
- Debt Service Coverage Ratio (DSCR) loans
Debt Service Coverage Ratio (DSCR) loans allow someone to buy an investment property using the proposed rental income as the only income. If the rental income is $1000 and the total mortgage payment, including taxes, insurance, and association dues if applicable, is equal to or less than $1000 you qualify for the mortgage and no other income is required. In certain scenarios only 75% of the payment must be covered by the proposed rent, meaning if rent is $750 and the total mortgage payment is $1000, you can potentially still qualify for the loan.
Non-QM loans are a viable option for many borrowers. These loans are designed to help borrowers with poor credit or who do not qualify for a traditional mortgage. They do not have the same restrictions as QM loans, and lenders have more flexibility when approving borrowers. However, it is important to work with a lender who is easy to work with.
When buying or refinancing a home, it’s important to understand all available mortgage products. Non-QM loans may be a good option for some borrowers. Still, it’s important to understand all the risks and benefits associated with this type of loan before signing on the dotted line. Work with a reputable lender to see if a non-qualified mortgage is a right fit for your needs.