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Non-Qualified Mortgage Loan Guide for Residential Property Buyers and Owners
There are two types of mortgages: qualified and non-qualified. The difference is whether or not the government agencies protect the lender against any type of lawsuit against them should a borrower become unable to afford their mortgage payments and want to sue.
What is a Qualified Mortgage?
A “qualified” mortgage (QM) means that the borrower meets certain requirements pertaining to his ability to afford the loan at the time of application. In this case, the lender would be protected against any penalties regarding this loan should the borrower default.
What is a Non-Qualified Loan?
A “non-qualified” loan (non-QM), on the other hand, means that the borrower does not meet the “qualified mortgage” guidelines and poses a higher risk in terms of default. Basically, these borrowers are those that do not fit into the conforming model, yet still have the credentials to obtain a mortgage from lenders willing to provide them. These loans are available, yet the protection against being sued by the borrower is not provided.
Qualified Mortgage Rules
Understanding what makes a qualified mortgage will help you determine if you fall into the non-qualified loan category. The requirements are as follows:
Debt ratio cannot exceed 43% no matter the type of loan (FHA, VA, conventional)
Points and/or fees should not exceed 3% of the loan amount
The loan cannot be interest only, have negative amortization, or any other risky features
Verification of income is required (no stated income or asset verification only)
Loan term must not exceed 30 years
If you do not meet all of these requirements, you do not fall under the QM rules. This does not mean you are automatically unable to get a loan or that you are destined to have a high interest rate and/or fees – it means you will have to go to lender that offers a non-qualified loan.
Going Beyond Qualified Mortgage Guidelines
The Qualified Mortgage guidelines make it difficult for certain borrowers to obtain a loan. Whether you have a credit score on the lower end of the spectrum and the lender needs to charge higher fees in order to make up for the risk or you cannot verify your income because you are self-employed, but have plenty of assets to afford the loan or your debt ratio is higher than 43%, you may still qualify for a loan, but be outside the QM guidelines. These are QM loans that are being offered by some lenders. Immediately following the housing crisis, loans for borrowers in any of these predicaments was hard to find, but they are more readily available today by a variety of lenders.