There are two types of loans that you can choose from when applying for a mortgage: non-QM and qualified mortgages. The differences between the two can be confusing, but we're here to help you understand what each one entails and which one is best for your situation.
With traditional qualifying loans (Qualified Mortgage, or QM) there are clear and strict rules on what constitutes a qualified loan.
A qualified mortgage (QM) is a type of mortgage allowed by the federal government that has specific guidelines. These guidelines are set forth by the Consumer Financial Protection Bureau (CFPB), a federal agency established in 2011 to protect consumers from unfair, deceptive, or abusive practices related to financial products. The requirements that an issuer imposes on it borrowers are called qualification standards. They include things like how much money you make, how much debt you have, and what kind of property you want to buy. In addition to qualification standards, there are also loan features that can affect weather or not a borrower qualifies for a mortgage. There are various types of QM home loans, like FHA loans, VA loans and USDA loans.
A QM requires that:
The borrower must have a good credit history and sufficient income to make monthly mortgage payments on time with proof of employment in order for the loan officer to issue the loan. In addition, borrowers cannot be delinquent on any credit obligations or have been subjected to foreclosure within the last three years to buy a home.
Non-QM vs Qualified Mortgages
Non-QM mortgages are not subject to the same rules and limitations as QM loans. These loans typically have less stringent requirements for down payment, debt to income ratio and repayment schedules. In addition, non-QM loans do not require your self employed income be verified by an outside source. However, there is a greater risk associated with these types of mortgages because they tend to involve higher interest rates and shorter amortization periods.
Qualified mortgages (QM) are loans that meet the standards set by the Consumer Financial Protection Bureau (CFPB). These standards ensure that QM loans are not based on your credit score, but rather on your ability to repay the loan.
There are two types of QM loans: adjustable-rate mortgages (ARMs) and fixed-rate mortgages (FRMs). As their names imply, FRMs have a fixed interest rate for as long as you keep paying on them. ARMs start at low rates and then rise after a period of time. Both types can be either government-backed or conventional mortgages.
You have more insurance protection when you take out a QM mortgage than with other types of lending products because underwriting requirements include proof that you can afford payments even if rates increase over time.
Non-QM may be the right choice for you if:
- You want a low interest rate.
- You have a low credit score.
- You have a high debt-to-income ratio.
- You are self employed, which may make it difficult to obtain traditional financing options.
You now have all the information you need to decide whether or not a non-qualified loan is right for your business. If you’re still unsure, contact us today for help!