You’re ready for homeownership—you understand the responsibilities of having a mortgage, and you’ve even worked out the numbers.
But just because you’re ready doesn’t mean you’ll qualify. If you’re self-employed, a gig worker, or retired, it will likely be harder to qualify versus traditional full-time employment, which comes with a W2 paystub.
However, it doesn’t mean you’re out of luck. A non-QM loan, which stands for a non-qualified mortgage loan, is a type of loan you may consider, as it provides more flexibility. It’s meant for borrowers who may not fit the traditional requirements to get a mortgage.
Non-QM loans have a specific set of qualifying criteria. Here is what you need to know.
What a Non-QM loan entails
The non-qualified part of “non-QM” means they are not considered qualified mortgage loans, which often result in higher fees. Non-QM loans don’t meet the Consumer Financial Protection Bureau’s (CFPB) requirements. Because of that, the loans are not considered qualified mortgages — they can’t be purchased by Fannie Mae or Freddie Mac. The lender is assuming the risk of non-QM loans.
A qualified mortgage, on the other hand, meets the CFPB’s standards, which entails factors such as borrowers having a reasonable debt-to-income ratio (DTI). Lenders are also not allowed to offer terms with a low introductory period and then sharply increase after the timeframe ends.
These loans are riskier for lenders, so you may end up paying a higher interest rate or putting down a larger down payment than a traditional loan.
Non-QM loans may be options for people who carry high debt, have inconsistent income, or have poor credit. Examples of these profiles may include:
- Qualified borrowers who are multiple property investors
- Being a foreign national
- Those who are repairing their credit
A qualified mortgage, on the other hand, meets the CFPB’s standards, which entails factors such as borrowers having a reasonable debt-to-income ratio (DTI). With qualified loans, lenders cannot offer terms with a low introductory period and then sharply increase after the timeframe ends.
Types of payments on a non-QM loan
Here are the types of payments you can expect to make if you have a non-QM loan to repay.
Interest-only payments: Some lenders offer an interest-only option that allows you to only pay the interest that accrues each month. The advantage for borrowers is a lower monthly mortgage in the first few years of homeownership. It can also be more expensive, as you may be paying a higher overall interest than a traditional mortgage. For interest-only mortgage loans, principal payments are typically due after the interest-only period ends. The interest-only period is usually between 3 and 10 years. After that, your monthly payment will increase because you must repay the principal and the interest.
Balloon payments: This is when you make a larger-than-usual, one-time lump sum payment at the end of your term. This is to keep mortgage payments lower in the beginning.
Longer loan term: Depending on your lender, you may be able to repay your loan over 30 years. Your payments would be lower, but you’d also extend the length of your loan, hence, pay more in the long run.
The pros and cons of a non-QM loan
- You can submit alternative documentation such as tax returns, bank statements, 1099s, and asset qualifiers.
- Credit requirements are more flexible.
- You may qualify even if you have several financed properties
- Down payments can be higher than a traditional loan
- Interest rates and fees can be more costly than standard loans
- Not all lenders offer non-QM loans
The Vendee™ Loan program
If you want to explore your options, VRM Lending LLC offers the Vendee™ Loan program to help borrowers find the right home, based on their unique needs.
The program allows qualified borrowers to purchase properties owned by the U.S. Department of Veteran Affairs (VA). The VA Vendee™ Loan program is open to veterans, non-veterans, owner-occupants, and investors.
Here are details about the program:
- Little to no money down for owner-occupant borrowers and investors
- No mortgage insurance requirements
- Originations and funding fees may be rolled into the loan for qualified borrowers
- Competitive interest rates
- No pre-payment penalties
Tips to get your finances in order
If you have a stable income and feel secure about making on-time monthly payments but don’t meet the requirements for a traditional loan, you could start with a non-QM loan. Later, if your situation improves, you may consider refinancing to a traditional loan.
Whether you apply for a non-QM loan or not, get your finances in better shape to improve your chances of qualifying for a traditional loan in the future. Here are tips to get started:
Improve your credit score: Pay your bills on time and reduce your credit card debt by increasing your monthly payments or paying off your cards. Also, don’t apply for new credit cards when going through the qualifying process for a loan because it may lower your credit score.
Increase your down payment: If you can, increase your cash to for a higher down payment, which helps keep monthly payments lower.
Get a cosigner: If you have a friend or relative who has good credit and is willing to cosign on the mortgage with you, you may qualify for a traditional mortgage.
VRM Lending LLC is here to answer your questions. Contact a mortgage loan officer today.
Trademark Disclaimer: Vendee™, Seller Financing (Vendee™), VA Vendee™ and/or other United States Veteran Affairs loan products referenced herein are either trademarks, servicemarks or registered trademarks of The Secretary of Veterans Affairs. Use of the Vendee™ logo or program name is authorized only by the Secretary of Veterans Affairs or its authorized agents.
VRM Lending LLC is not affiliated with or acting on behalf of or at the direction of FHA, VA, or the Federal Government. VRM and VRM Lending are separate, affiliated entities.
VRM Inc. is licensed in CA and IN (see NMLS).