The world of home loans is a big one, and there’s lots to learn—not to mention the process of actually applying for a mortgage of your own. And for certain borrowers, the standard requirements put in place by most conventional lenders may make it difficult or impossible to qualify.
Enter the non-QM loan, or non-qualified mortgage. For borrowers with irregular income, higher debt-to-income ratios (DTI), or whose paperwork doesn’t match up seamlessly with what most lenders expect, a non-qualified mortgage could be the path of least resistance toward the goal of homeownership, unlocking the potential to fulfill a lofty and important financial goal.
But what, exactly, does non-qualified mean?
What is a non-qualified mortgage?
As mentioned above, a non-QM loan is short for non-qualified mortgage. While we’ve written a whole explainer about these sorts of loans in the past, here’s the basic gist.
Remember the housing crisis in 2008? It’s not an easy one to forget: all those foreclosures left a serious scar on America’s housing market history. In response to the chaos, the government passed the Dodd-Frank Act, which issued some new guidelines as to how borrowers should be qualified for mortgages—specifics around both the structure of the loan itself and the eligibility requirements borrowers must meet.
In short, qualified mortgages (which most conventional mortgages are) include detailed and strict documentation requirements and income verification processes—ones that align with those government-issued guidelines managed by Fannie Mae and Freddie Mac. As part of the underwriting process, you’ll be required to submit tax returns, bank statements, and other documents that prove your income to the lender, along with the othe basics like allowing your credit history to be checked.
Non-qualified mortgages, or non-QM loans, however, are those that do not fall in line with those guidelines—and, thus, non-QM lenders do not subject borrowers to those same strict requirements.
Who may see advantages with non-QM loans?
For many borrowers, a qualified mortgage loan is just fine: if you earn a regular, predictable wage reported on a W-2 form and your credit report is in good shape, you probably run a decent chance of qualifying for a conventional loan.
On the other hand, if you’re self-employed, a small business owner, or someone whose income fluctuates on a monthly basis, a qualified mortgage may be more of a reach for you. It’s certainly possible to qualify for a conventional loan as an independent contractor, but if your income is extremely irregular, it may be more challenging.
Even if you’ve accrued a decent amount of wealth, it can be difficult to prove your worth to a lender if your paperwork doesn’t match up. That’s thanks to the income and employment verification processes required in qualified mortgages by some lenders.
Which is exactly why we offer our Community Development Loan (CDL), a non-qualified but high-quality mortgage program specifically designed for non-traditional borrowers. (It’s kind of like the no-doc mortgages of yore, but evolved.) These loans utilize a holistic approach when it comes to qualifying borrowers, and don’t have a strict income verification process—which means so long as you have a substantial down payment, solid credit score, and meet the rest of the requirements, you may be eligible even without the standard paperwork you’d need with another lender.
The potential advantages of non-QM loans like our Community Development Loan are well suited to a wide variety of would-be homebuyers: not only self-employed borrowers and entrepreneurs, but also foreign nationals, real estate investors, low-income families and many other communities. As one of only 3% of U.S. banks with a CDFI certification, it’s part and parcel of our mission to help underserved communities get the financing they deserve. We also offer many other loan programs, including traditional mortgages, FHA loans, VA loans and more. Whether you’re refinancing, looking at investment property, or jumping into your first-ever home purchase, we may be able to help.
Curious if a CDL might be right for you? Reach out to one of our mortgage specialists for more information on the various loan options we have available.
Quontic Bank is not affiliated with or acting on behalf of or at the direction of Federal Housing Authority (FHA) or any government agency or government sponsored entity. All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of April 17, 2022 and is subject to change without notice.