NON-QM Versus Traditional Mortgages
In this guide, we will compare and contrast non-QM versus traditional mortgages. We will go over the pros and cons of non-QM versus traditional mortgages and the mortgage loan options which may be best suited for you. In your journey to owning a home, you will need a mortgage loan.
There are two main types of mortgage loans you can receive. The traditional mortgage loan you will receive is a qualified mortgage (QM loan). These are the loans you will receive if you can provide all necessary documentation as the CFPB requires. The alternative is non-QM loans which are also referred to as non-prime loans. In the following paragraphs, we will compare non-QM versus traditional mortgages.
What Are The Differences Between Non-QM Versus Traditional Mortgages
We will explain the major differences between non-QM versus traditional mortgages. The CFPB or consumer financial protection burrow is a company that regulates mortgage loans to make the safest environment possible for the financial protection of both the lender of a mortgage loan and the borrower of the loan.
What Are Qualified Mortgages or QM Loans
These qualified mortgage loans are less harsh with the terms and conditions of the loan taken. Qualified mortgages or QM loans have strict accountability by the mortgage lender where the lender needs to follow protocols on the borrower’s ability to repay the loan. Qualified mortgages are also referred to as traditional mortgages.
What Does Non-QM Mean In Mortgages?
The other type of mortgage loan found is a non-qualified mortgage loan (non-QM loan). These non-qualified mortgage loans are harsher in the terms and conditions of the loan taken. This is because you did not have all the required documentation for the qualified mortgage loan.
Since the lending company can not be fully sure you can pay the loan back in full due to the documentation error, the terms have to be less kind to the borrower as an insurance policy in case you have to back out of the loan. These mentioned policies are rules set into place by the CFPB to make the mortgage loan experience a better financial experience for both the borrower and the lender.
What Is A Non-QM Loan?
What is a non-qualified mortgage loan? It is a loan that does not follow the lending guidelines put in place by the CFPB. The CFPB or Consumer Financial Protection Bureau is a company that makes sure that you have the best protection and treatment from banks and lenders.
Now, this might seem like a really good thing to have on your side, after all going against the protections of a company that protects you in the deal seems like a bad idea. However, due to the amount of documentation of said guidelines, you might not even qualify for a mortgage loan. This is the situation where you would have a non-qualified mortgage loan as opposed to a qualified mortgage loan.
How Does Non-QM Versus Traditional Mortgages Differ?
Without the existence of non-QM loans, many people would not even be able to purchase their homes. There are many different situations that apply for a QM loan, so many different kinds of QM loans exist. this is why it is a valuable tool to understand. So even though you might want to be protected by these guidelines, just the existence of them might not allow you to use said guidelines in your home buying process. This prevention would keep a large percentage of potential home buyers from owning a home if non-qualified mortgage loans did not exist.
What Is The Best Mortgage Loan For Me?
A traditional mortgage loan or qualified mortgage loan is a type of loan that follows all guidelines set in place by the CFPB. these guidelines are important pieces of documentation used by mortgage companies to ensure that you will be able to pay the loan back. These guidelines are Mortgage insurance, Credit score, Employment, Self-employment, Income, Debt-to-income ratio, and Cash reserves. These loans will have significantly more protections than non-qualified mortgage loans.
Which Loan Types Are Safer: Non-QM Versus Traditional Mortgages?
The CFPB makes these guidelines to ensure that the borrower can not be overcharged or taken advantage of by the lender. These protections include stopping the following from happening to you: An “interest-only” period, when you pay only the interest without paying off the principle, which is the amount of money you borrowed. “Negative amortization,” which can allow your loan principal to increase over time, even though you’re making payments.
What Are Balloon Payment Mortgages?
“Balloon Payments,” which are larger-than-usual payments at the end of a loan term. The loan term is the length of time over which your loan should be paid back. Note that balloon payments are allowed under certain conditions for loans made by small lenders. Loan terms that are longer than 30 years. These are all fantastic protections that will make the loan borrowing process much easier for the borrower. These terms are much easier to pay off and will result in less total money spent by the borrower.
What Types Of Non-QM Loans Exist?
Unlike qualified or traditional mortgage loans, many different loans fall under the category of non-qualified mortgage loans. The reason you would get a non-qualified mortgage loan is that you can not provide all the necessary documentation to receive a qualified mortgage loan, and for whatever piece of documentation, you are missing a non-qualified mortgage loan exists. Some of these types of non-QM loans are asset qualifier home loans, bank statement loans, investor cash flow home loans, ITIN mortgage loans, and 1099 income loans.
Asset Qualifier Home Loan
An asset qualifier home loan is a type of non-qualified mortgage loan that allows for a mortgage using your liquid assets instead of income for proof of ability to pay. Liquid assets can be classified as your bank accounts, such as checking or savings accounts, retirement funds, or investment accounts. If you have many liquid assets to your name, but generate little to no income, an asset qualifier home loan might be the strongest choice for your financial safety.
Bank Statement Mortgage Loans
A bank statement loan is another type of non-qualified mortgage loan that allows self-employed borrowers to receive a mortgage loan using a bank statement instead of tax returns, W-2s, or pay stubs. A bank statement loan might also commonly be referred to as self-employed mortgages or alternative documentation loans.
Bank statement loans are the perfect solution for self-employed individuals with no documentation for steady income or having more than one employer, and proving your income can be difficult in these circumstances. Many self-employed individuals have messy documentation regarding tax return documentation. This is why the bank statement loan is available for them.
Investor Cash Flow Home Loan
If you’re a real estate investor looking to grow your investment portfolio and get new properties, you can use the cash flow from your current homes to gain access to a mortgage loan. Depending on the lending company, you may not need to provide tax returns or employment information to get an investor cash flow loan.
1099 Income Mortgage Loans
1099 income loan is a loan type for 1099 earners who do not qualify for a qualified mortgage. This can include freelance workers, independent contractors, gig workers, or any other individual with employment types that files W-9. Borrowers can use their 1099 earning statements rather than tax returns to verify their income and become eligible to receive a mortgage loan.
ITIN Mortgage Loans
An Individual Tax Identification Number (ITIN) mortgage is a loan program for borrowers who are not eligible for Social Security numbers. When someone living in the United States does not qualify to receive a Social Security number, they will be issued an ITIN. ITIN is typically used in place of SSN for identification purposes. This type of loan gives immigrants the opportunity to own a home in the United States without owning a Social Security number. Requirements for an ITIN mortgage vary by lender, but the one constant is requiring the ITIN for identification.
Foreign National Mortgage Loan Program
Foreign nationals can find it troublesome to purchase or refinance a home in the United States because of a lack of documentation. Fortunately, foreign national programs can help protect non-citizens or individuals who consider themselves resident aliens to purchase their first residence, second home, or property for investment.
Jumbo Home Loans
A Jumbo home loan is a mortgage that goes over the amount set by the Federal Housing Finance Agency (FHFA). A loan is considered a Jumbo loan if it exceeds the loan-servicing limit, currently $647,200 for a single-family home in 2022. This loan product is a perfect fit for wealthy homebuyers looking to purchase or refinance higher-priced properties.
Advantages of Non-QM Versus Traditional Mortgages
Non-Qualified mortgage loans and traditional mortgage loans have their own advantages and disadvantages. You will likely have a safer financial experience with a traditional mortgage loan. But the real advantage of non-qualified mortgage loans is that it is a way for underqualified people to be approved. And at the end of the day, getting the loan means that you will be able to achieve the great dream of owning your dream home. So if for whatever reason you can not get the financial records and documentation required for a qualified mortgage loan, the unqualified mortgage loan is always a safe fallback option to get a mortgage and thus own a home.
Lending Guidelines on Non-QM Versus Traditional Mortgages
It is significantly easier to be approved for a non-qualified loan, possibly the only option for people that fall into certain employment and financial categories. But once you have either mortgage loan, how does the difference between the two loan options in practice? The clear advantage of non-qualified loans is that they have much more flexibility.
What Does Negative Amortization Mean?
The terms include negative amortization: Amortization means paying off a loan with a regular predetermined payment system so that the amount you owe goes down with each payment. Negative amortization means that even when you pay, the amount you owe will still go up because you are not paying enough to cover the interest.
This can be confusing so let’s see an example: if a payment is for two-thousand dollars and you can only afford to pay one-thousand dollars, then one-thousand dollars would be added to the loan’s principal amount. And although this is not an ideal situation, it can save you from not being able to make a payment.
Advantages of Non-QM Versus Traditional Mortgages
Non-QM loan advantages also include terms that extend for longer than thirty years and interest-only payments. However, there are some drawbacks that can occur from taking a non-qualified loan. These drawbacks include high-interest rates and fees: Non-QM loans usually come with high-interest rates and fees due to the lending risk associated with the lack of documentation you were capable of providing. This means you may end up paying more in interest.
Best Non-QM Mortgage Lenders
Being difficult to find: Not all mortgage lenders offer non-QM loans, so they may be harder to find. You can look around online for non-QM lenders and do your research before working with one. Greater risk of default: Non-QM loans such as interest-only mortgages, where you’re required to pay only interest on the loan over a certain period of time, may increase your risk of defaulting.
Down Payment Requirements on Non-QM versus Traditional Mortgages
Having higher down payments: Down payments for non-QM mortgage loans are usually higher than other mortgage products. Lenders require a sizable down payment to lower their lending risk in case you cannot pay, this is reasonable though because by taking this loan it is established that you do not have significant enough financial documentation to be trusted to pay back the loan as much as you would be in a qualified loan.
Importance of Non-QM Versus Traditional Mortgages
The two major types of mortgage loans are qualified mortgage loans and non-qualified mortgage loans. The main difference between these two types of mortgage loans is that a non-qualified mortgage loan is easier to receive, but it is also a riskier loan with harsher conditions. Non-qualified mortgage loans are easier to obtain because they require less documentation for approval. Many different types of non-qualified mortgage loans exist, all to fit different situations where documentation is unavailable.
Regulations on Non-QM Versus Traditional Mortgages
As a product of the lack of documentation, the loan has much harsher terms for the borrower. This is the opposite of qualified mortgage loans because of the guidelines put in place by the CFPB. These guidelines are to protect the borrower, while still being fair to the lender.
They require a strict list of documentation that assures the lender that you will be able to repay the loan. And they also put in place rules on what the lender can and can not do in the terms of the loan being put in place. This balance is why if you are a borrower in the market for a mortgage loan, a qualified mortgage is always the best option. But even though it is not the best option, a non-qualified mortgage loan of any type is still a path for you to own a home.