What are Non-Qualifying Mortgages?: Defining Non-QM Loans and How to Choose the Right One

Posted by Hannah Lapin on Nov 21, 2019 9:00:00 AM
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Non-QM has become a new buzzword. It seems all the lenders these days are offering a hip new Non-QM product and encouraging brokers to broker non-QM loans. So, what actually is a non-QM loan? A good place to start is in defining QM or Qualifying Mortgage.

The concept of a Qualifying Mortgage originated as a result of the 2008 financial housing crisis. Leading up to the financial crisis, there were all kinds of innovative loan products with creative rate structures on the market that ultimately borrowers couldn’t pay back. To reign in lenders and ensure that borrowers can afford the loans they are receiving, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act that put into place the QM rule. It is a complicated rule, but ultimately QM lenders must comply with stringent rules to make sure the consumer mortgage borrower can repay their loan.

The Rise of Non-QM

The technical requirements of QM, however, exclude many creditworthy Americans. For instance, what happens when the self-employed contractor with multi-millions doesn’t qualify for a qualifying mortgage because he doesn’t have the documentation needed? The guy with the ten-million-dollar net worth and perfect credit should be an ideal borrower, right? In the last three years, lenders and the capital markets have started to serve these people and fill the gaps. Capital markets have gotten increasingly comfortable with non-QM loan products, and lenders have gotten increasingly better at putting reasonable processes into place to determine the borrower’s ability to repay.

QM vs Non-QM Investment Loans

When it comes to financing an investment property, QM loans are the most affordable option, yet they have strict guidelines in place. Investors just getting started, particularly those with high income, are drawn to QM loans. Newer investors are often able to document their income and meet the strict criteria set forth by Fannie and Freddie.

On the other hand, non-QM investment loans meet the needs of professional investors with portfolios of rental properties. Non-QM loans are much easier to qualify for, despite the larger expense. Not to mention, professional investors are focused on building wealth over time and growing their monthly cash flow. In the big picture, the slightly higher investment property mortgage rates are outweighed by the significantly greater flexibility they have to achieve their larger investment goals.

Kinds of Non-QM Loans

A non-QM mortgage is a mortgage that fits outside the rules of a qualifying mortgage. This covers many buckets such as jumbo loans, bank statement loans, foreign national loans, and more. It can also include investor loans, such as Visio’s Rental360 Loan Program

Jumbo Loans

A jumbo loan is a loan that exceeds the limit established for Fannie and Freddie, which is $548,250 for 2021. Jumbo loan borrowers can be either owner occupiers, second home purchasers, or investors looking for a larger sum of money than the agency limit.

Bank Statement Loans

Bank statement loans are also known as self-employed mortgages or alternative documentation loans. To qualify for one, a borrower can use their personal and/or bank accounts to prove their income rather than W2s and tax returns. These loans are ideal for self-employed borrowers or contractors who do not meet agency requirements based on tax returns.

Foreign National Loans

Fannie and Freddie do not offer loans to foreign nationals, but there are still loan programs for these individuals. Foreign national loan programs are designed for non-residents looking to purchase real estate in the United States.

Investor Loans

Investor loans are loans originated for property purchasers who are not owner occupiers and usually are underwritten based on the cash flow of the property rather than personal income. Measuring the cash flow rather than the personal income enables investors to acquire multiple properties.

Why Non-QM Loans Appeal to Investors

While it is possible to obtain agency financing for investment properties, the underwriting guidelines can be restrictive. 

Non-QM Investor Loans are Underwritten Based on Property Cash Flow

An experienced investor with multiple mortgaged investment properties and self-employed borrowers investors without W2s often have difficulty meeting the personal income requirements set by Fannie and Freddie. Non-QM investor loans also have lower documentation requirements than traditional qualifying mortgages. 

Non-QM Loans Allow Investors to Borrow in an LLC

Many experienced investors prefer to borrow through an LLC or corporation to protect their identity and other investments. Agency loans can only be obtained in an individual(s) name.

Non-QM Loans Enable Investors to Quickly Grow their Portfolio of Rentals

Even if you have enough personal income to support multiple mortgages, with Fannie and Freddie, you are maxed out at 10 loans. Non-QM lenders do not have a limit offering investors the opportunity to grow their portfolios before other investments are fully paid off.

What Should You Look for in a Non-QM Investor Loan?

There are many non-QM investment lenders on the market and determining which one is the best for you can be overwhelming. We always recommend consulting your counsel for personal guidance, but here are some questions to take into consideration.

What are the lender’s rates and fees?

While this may sound like a given, it is important to know exactly what your costs will be for the loan. The last thing you want is to end up at the closing table with unexpected costs. Make sure you have a clear picture of any underwriting fees, legal fees, and any possible factors that could adjust your rate.

What are the lender’s eligible property types?

Different non-QM lenders allow for different properties. For example, some non-QM lenders do not allow non-warrantable condos, boarding houses, or multi-family homes. Lenders also have different requirements and programs for property condition.

Is the lender investor-friendly?

Lenders who work with investors regularly typically have the optionality to meet your investment strategy. For instance, Visio has prepayment penalty and rate buy-downs as well as a selection of rate structures to provide investors the flexibility they need.

Secure a Non-QM Loan from Visio Lending

Visio is a leading provider of non-QM rental loans. Our Rental360 is underwritten based on property level cash flow and borrower credit, rather than the borrower’s personal income.  As a result, the Rental360 is an ideal financing product for the self-employed investor or the investor that is building a portfolio of properties.

Contact Us to Start Your Loan

Related: Understanding Prepayment Penalties, Understanding Series LLCs

Topics: Real Estate Investing

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