Non-Prime or Non-Qualifying Loans


Non-QM Does Not Necessarily Mean High Risk

A Non-QM loan (non-qualifying mortgage loan) is not inherently high-risk, nor is it subprime. Rather, a non-qualifying loan is simply a loan that does not fit into the complex rules associated with a QM loan. In fact, many of these loans may actually have borrowers with good FICO scores, along with other strong borrower attributes like steady jobs and plentiful assets. However, because of the rules and scrutiny associated with non-QM lending, banks are able to choose if they want to keep these loans instead of selling them to other investors.

Interest-Only Loans Are Non-QM Loans

Interest-only loans are a popular type of mortgage that are not covered by the QM rule. Many lenders will still originate these loans because there is a demand for this kind of loan structure. Such a loan would be referred to as Non-QM or Non-Prime.

Stated Income Is a Feature of a Non-QM Loan

Another common feature of a Non-QM loan is the documentation type. Many Non-QM loans allow for alternate income documentation such as bank statements on a self-employed business owner. QM-compliant loans must be fully documented with standard income underwriting protocols. If a borrower may not be able to provide traditional forms of documented income, a Non-QM loan could be the best alternative for gaining a loan approval, especially with excellent credit, assets, and employment history.

Loans with DTI Ratios Above 43% Might Be Non-QM

Loan programs allowing higher debt-to-income ratios (above 42% DTI) would be considered Non-Prime or Non-QM loans. Most secondary market loans (Fannie and Freddie, etc.) prefer loans with debt to income ratios of less than 42%. If a borrower has decent credit, sufficient assets, and post-closing assets to cover at least six months of payments, a Non-QM loan may be the right answer to a borrower whose DTI is higher than normal. Non-QM loans may also allow the use of assets to qualify when income falls short, which still satisfies the Ability to Repay rules required for all mortgages.

Many analysts speculate that by the end of the current decade, the use of Non-QM loans could potentially grow to hundreds of billions annually in the future.  However, Fannie Mae and Freddie Mac are now expanding their guidelines to allow more borrowers to obtain financing in order to stimulate the overall economy and continue to help future home buyers achieve the dream of ownership of a home.



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