What is a non-QM loan?

Non-QM loan basics

A non-QM loan can help borrowers who don’t have steady W-2 income but do have strong assets qualify for a mortgage. Perhaps the most important thing lenders want to see on a mortgage loan application is steady and reliable income.

That’s because borrowers who have this type of financial situation are the most likely to be able to repay their mortgage through on-time monthly payments over a long period of time. But many people who are otherwise well-qualified for a mortgage (and perhaps some who are only moderately qualified) don’t have regular and predictable income streams.

Here are just a few scenarios where people might need to seek a non-QM loan:

• A freelancer with steady work whose client pays invoices inconsistently.
• A real estate agent who receives large payouts when they sell a home, but they only sell a few homes each year.
• A wealthy retiree seeking to purchase an investment property strictly using investment income rather than W-2 income.
• Someone looking to purchase a multiunit dwelling, such as an apartment building.

A non-QM loan is perfect for people who are self-employed, have irregular income, rely on investment income or have strong assets but limited W-2 income, Jessica Vance, loan officer with Anchor Funding in San Diego, California, told us. “Real estate investors often use them to finance rental properties or scale their portfolios,” she said.

It’s important to note that non-QM loans aren’t the same as subprime mortgages. These mortgages are aimed at people who may not otherwise qualify for any type of mortgage due to poor credit, unstable finances or other disqualifying factors.

Key differences between QM and non-QM loans

The biggest difference between QM and non-QM loans is flexibility, Vance said. “Non-QM loans don’t rely strictly on standard income verification like W-2s or tax returns. Instead, lenders focus on the borrower’s overall financial picture, including assets, cash flow and investment property performance.”

Here are some features of non-QM loans, according to Vance:

• Unlike qualified mortgage loans, they aren’t backed by a government agency.
• Rates can be either fixed or adjustable.
• Some non-QM loans use a property’s rental income to help qualify the borrower, which is common for apartment buildings or condos.
• They offer out-of-the-box solutions such as interest-only financing, balloon payments and longer repayment terms.
• Borrowers can also finance multiple properties under a single lender.
• Loan amounts can exceed standard limits, and these loans usually carry higher interest rates.

Qualifying for a non-QM loan

When it comes to qualifying for a non-QM loan, your lender will look at a variety of factors to assess your overall financial health. Just like a conventional mortgage lender, they’ll pull your credit history, but they’ll also consider your assets and verify all sources of income, regardless of regularity. “This is a big advantage for high-net-worth individuals who have significant assets but lower reported monthly income,” said Vance.

In cases where the loan will be used for an income-producing property, lenders will examine the potential performance. Perhaps an investor seeks to purchase a mountainside condo community near a ski resort or a large barn that they intend to use as a wedding venue. The lender will consider the reasonable income potential as part of the non-QM loan process.

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Who benefits from non-QM loans?

Non-QM loans most often benefit self-employed individuals. “For these borrowers, income is often irregular or not fully captured on W-2s or tax returns. Non-QM programs allow verification through bank statements, cash-flow analysis or other methods, which makes qualifying a lot simpler,” said Vance.

In addition, non-QM loans offer significant advantages for real estate investors and high-net-worth individuals. These transactions are often funded with investment income or property cash flow, rather than personal income, Vance told us.

“One huge win is that non-QM loans generally don’t require tax returns or extensive personal documentation,” Vance said. “Investors can also finance multiple properties, sometimes 10 to 20 per lender, which makes scaling a real estate portfolio much easier. Traditional finance companies usually cap borrowers at about 10 properties, so this flexibility is a big deal.”

Benefits and drawbacks of non-QM loans

When trying to decide if a non-QM loan is the right move for you, you’ll want to consider the following benefits and drawbacks: