Non-QM Mortgages: Are They the Right Choice for Your Home Financing Needs?
If you're in the market for a mortgage to purchase or refinance a home, you may have heard the term "non-QM mortgage" thrown around. But what exactly is a non-QM mortgage, and is it the right choice for your home financing needs?
First, let's define what we mean by a "QM" or "qualified mortgage." In 2014, the Consumer Financial Protection Bureau (CFPB) established rules for mortgage lenders to ensure that borrowers had the ability to repay their loans. A QM mortgage is a type of mortgage that meets these guidelines, which include factors such as debt-to-income ratio and verifying income and assets.
So, a non-QM mortgage is simply a mortgage that doesn't meet these guidelines. This can include loans to borrowers with high debt-to-income ratios, self-employed borrowers who have difficulty proving income, or borrowers with other unique circumstances.
Non-QM mortgages can be attractive for borrowers who don't qualify for traditional QM mortgages, but there are some potential risks to consider. Here are a few things to keep in mind when deciding if a non-QM mortgage is right for you:
- Higher interest rates and fees
Since non-QM mortgages are riskier for lenders, they often come with higher interest rates and fees than traditional QM mortgages. This can mean higher monthly payments and more money paid over the life of the loan. It's important to weigh the cost of the loan against the benefits of being able to secure financing that you might not otherwise qualify for.
- Non-traditional terms
Non-QM mortgages can come with non-traditional terms, such as interest-only payments, balloon payments, or adjustable interest rates. It's important to understand the terms of the loan and how they will impact your monthly payments over time. For example, an interest-only loan may have lower payments initially, but you'll need to be prepared for higher payments when the interest-only period ends.
- Limited lender options
Since non-QM mortgages are riskier for lenders, there are fewer lenders who offer them. This can limit your options and make it more difficult to shop around for the best rates and terms. Be prepared to do your research and potentially work with a mortgage broker who specializes in non-QM mortgages.
- Potential for foreclosure
Non-QM mortgages may come with higher risk for the borrower, as well. If you're unable to make your payments and default on the loan, the lender may be able to foreclose on your home more easily than with a QM mortgage. It's important to understand the potential consequences of defaulting on a non-QM mortgage and have a plan in place for making your payments.
In conclusion, non-QM mortgages can be a good option for borrowers who don't qualify for traditional QM mortgages, but it's important to understand the potential risks and costs associated with these loans. Be sure to do your research, shop around for the best rates and terms, and have a plan in place for making your payments on time to avoid defaulting on the loan. With careful consideration, a non-QM mortgage can be the right choice for your home financing needs.