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What is a Non-Qualified (non-QM) Mortgage?

Non-qualified mortgage (non-QM) transactions refer to mortgage loans that do not meet the qualified mortgage standards set by the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Wall Street Reform and Consumer Protection Act. These loans do not adhere to the strict requirements and criteria established for qualified mortgages, such as the ability-to-repay rule.

Here are some key characteristics of non-qualified mortgage transactions:

  1. Alternative Documentation: Non-QM loans often require borrowers to provide alternative forms of documentation to verify their income and financial status. This can include bank statements, asset statements, or other documents that demonstrate the borrower's ability to repay the loan.

  2. Flexible Debt-to-Income Ratio (DTI): Non-QM loans may allow for higher DTI ratios compared to qualified mortgages. While qualified mortgages generally have a DTI limit of 43%, non-QM loans may accept higher ratios, allowing borrowers with higher levels of debt to still qualify for a mortgage.

  3. Interest-Only Payments: Some non-QM loans offer interest-only payment options, where borrowers are only required to make payments towards the interest portion of the loan for a specified period. This can provide flexibility in the early years of the loan but may result in larger payments later on.

  4. Non-Traditional Property Types: Non-QM loans may be used for non-traditional property types that do not meet the criteria of qualified mortgages, such as investment properties, mixed-use properties, or properties with unique characteristics.

  5. Subprime or Riskier Borrowers: Non-QM loans can cater to borrowers who do not meet the stringent credit requirements of qualified mortgages. This includes borrowers with lower credit scores, previous credit issues, or non-traditional income sources.

  6. Higher Interest Rates: Due to the increased risk associated with non-QM loans, lenders may charge higher interest rates compared to qualified mortgages. Borrowers may need to accept higher costs in exchange for the flexibility provided by these loans.

  7. Portfolio Loans: Non-QM loans are often held by the lender rather than being sold on the secondary mortgage market. This allows lenders to have more flexibility in underwriting and approving loans that do not fit within the qualified mortgage criteria.

It's important to note that non-QM loans come with increased risk for both lenders and borrowers. Borrowers should carefully consider their financial situation, repayment ability, and long-term plans before entering into a non-QM transaction. Lenders will also assess the borrower's ability to repay the loan, although the criteria may differ from qualified mortgages.

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