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What is a Non QM Loan
Non-QM means non-qualified mortgage. Think of a Non-QM Loan as the replacement for the subprime loans of the past. A non-qualified mortgage does not meet federal standards to be considered Qualified.
Examples of Non-Qualified Mortgages
- Points and Fees greater than 3% on a loan amount of $100,000 or more
- Risky features such as negative amortization or interest only payments
- Debt to Income ratio is higher than 43%
- Income has not been verified
Why Choose a Non QM Loan
A Non-Qualified mortgage is typically chosen for reasons most people would not expect. Typically a borrower must have good credit to qualify for a Non-QM loan however, they might have an issue documenting income. Sometimes people choose a Non-QM loan because of a unique property type.
Non QM Programs
Some of the most popular Non-QM loans allow alternative methods of income verification. Here is a breakdown of some popular Non-Qualified mortgage programs.
Investor Cash Flow Mortgage Program
This is a program specifically created for investors. The program allows a prospective buyer to qualify only using the subject property’s positive cash flow. This offsets the need for an investor to have a large amount of cash on hand to qualify for a investment property purchase.
- Finance 1-4 unit properties
- 80% financing ( 20% Down)
- Income based on property positive cash flow
Bank Statement Mortgage Program
The bank statement program is a program that does not require tax returns. You can provide business or personal bank statements to show income. The underwriter will add up the deposits on the bank statements and take a percentage as qualifying income. There are several ways to calculate income so I will not go into details here. Here are some of the characteristics of a bank statement loan.
- 90% Financing ( 10% Down )
- Cash out Refinance up to 80% Financing
- Interest only payment options available
- Bank Statements same as income
1099 Only Mortgage Program
THe 1099 program is another Non-QM loan that can qualify a borower with alternative documentation. You only need to provide copies of your 1099 statements. As long as you have been on the job for 1 year, you could qualify. Here are the characteristics of the program.
- 90% Financing (10% Down)
- Cash out up to 80% Financing
- Buy a 1-4 unit property owner occupied
Asset Qualifier Mortgage Program
The asset qualifier program is my personal favorite because it helps so many important demographics. Typically when someone retires, the income temporarily stops. At the same time, they have built up a large nest egg with a 410k or a 403b. Because they have such a large amount in savings or investments they would qualify for the asset qualifier loan. The bank calculates a percentage of available assets ( Typically 75% ) and agrees to lend the borrower up to that amount for a home purchase. You can purchase 1-4 units and even a mixed-use property. Mixed-use means a property with a business on the property. Some characteristics of the loan are as follows.
- 90% Financing ( 10% down)
- No employment necessary
- No Income Required
Mortgage Insurance (PMI)
Mortgage insurance is a type of protection for the bank that is required to be paid by the buyer. On a Conventional loan, mortgage insurance is required if you put less than 20% down. On a Non-QM loan, no mortgage insurance is required.
Conventional Loans vs Non QM
Although interest rates are typically higher on a Non-QM loan, they do not require mortgage insurance. If you purchased a home using a Conventional loan at 5% with .42% annually in mortgage insurance, you are basically paying 5.42% on the home… not 5%.
This is important to note because Non-QM loans might have an interest rate as high as 6%. When you consider that no mortgage insurance is required, the difference between Conventional and Non-QM loans shrinks considerably.
Advantages of Non QM
Non QM loans allow unconventional borrowers to purchase homes with alternative documentation. That is the strength of Non-QM financing.