How are Non-QM and Subprime Loans Different?

Loan Types
Nontraditional Mortgages
When considering a Non-QM home loan, it's important to understand the differences and history between subprime and non-QM before making your decision.
Published on
July 16, 2024
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Introduction

Non-QM loans are a type of mortgage loan that allows you to qualify for a mortgage loan, even if you don't meet the traditional criteria. If you have less than perfect credit, or no credit history altogether, these types of mortgages can be your best option for homeownership. In this article, we'll explain what non-QM mortgages are and how they differ from the previous subprime loans.

What is a Subprime Mortgage?
  • A subprime mortgage is a loan given to borrowers with poor credit or who have little to no down payment.
  • They are often called “high risk” loans because they can come with higher interest rates, prepayment penalties and other unfavorable terms.
  • Subprime mortgages do not exist anymore because of the 2008 housing crisis. The Financial Crisis Inquiry Commission determined that these loans contributed to the subprime mortgage crisis by providing borrowers with more home than they could afford
What Are Non-QM Loans?

A non-QM loan is a type of mortgage that does not require the borrower to meet the traditional requirements for obtaining a conventional loan. This may be because the borrower’s credit score is too low, or his or her income is too high. These types of mortgages are known as non-qualified loans, and they can be obtained from lenders who do not participate in Fannie Mae or Freddie Mac programs.

There are several differences between subprime mortgages and non-QM loans:

Non-QM loans are not eligible for securitization, so they cannot be sold off in this way. This makes them less risky for lenders who sell non-QM loans directly to borrowers. This prevents the same situation that happened before the 2008 market crash. Lenders are also required to prove that the borrower is capable of paying back the loan in full with bank statements, proof of employment or 1099 forms.

What are the Advantages of Non-QM Mortgage?
  • You can get a loan with higher interest rate.
  • You can get a loan with lower down payment.
  • Your credit score does not matter as much for getting the non-QM mortgage.
  • You can get a loan even if you have too much debt in relation to your income or assets.
The non-QM loans allow you to qualify for a mortgage loan, even if you don't meet the traditional criteria.

Many people are not aware of the existence of non-QM loans. This is because these mortgage loan programs were designed to be marketed to a niche audience, due to their strict guidelines and requirements. The non-QM loans allow you to qualify for a mortgage loan, even if you don't meet the traditional criteria.

  • You can still get a mortgage loan even if you have a low credit score or high debt-to-income ratio (DTI)
  • Not all lenders offer these types of mortgages; however, they're becoming more common as more individuals are struggling with their finances and no longer qualify for traditional mortgages
Conclusion

The non-QM loans allow you to qualify for a mortgage loan, even if you don't meet the traditional criteria. These loans are more expensive than what most lenders offer, but they can still be beneficial if you need to buy a home quickly or have bad credit history.

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