Non-Qualified Mortgage (QM) Loans

What’s A Qualified Mortgage?

A qualified mortgage loan (QM loan) meets all the consumer protection requirements of the Dodd-Frank Act. Borrowers must have reasonable debt-to-income ratios (DTI), and lenders can’t offer mortgage products with artificially low introductory monthly payments that sharply increase when the introductory period ends.

What Are The QM Rules? 

To understand what a qualified mortgage is, it’s helpful to look at the rules lenders need to meet to loan you a qualified mortgage. Qualified mortgages can’t have the following:

  • Risky loan features, or those that offer artificially low monthly loan repayments in the early years of the loan term sometimes referred to as subprime mortgages.
  • High percentages of borrower’s income going toward their debt. There are limits as to how much of a borrower’s income can go toward their debt. This is also known as their Debt-To-Income (DTI) Ratio and it can’t be more than 43%. 
  • Very High Fees. The limit on costs and fees will vary by the size of the loan, but if they’re over the threshold, the loan can’t be considered a qualified mortgage. 
  • Loan Terms longer than 30 years.

A qualified mortgage also means that your lender has followed the ability-to-repay rules. That means that a lender will ask about and document your income, assets, credit history, employment and monthly expenses to make a good faith effort to figure out if you’ll be able to repay the loan they are offering you. 

What is a Nonqualified Mortgage?

A nonqualified mortgage (nonQM loan) doesn’t conform to the consumer protection provisions of the Dodd-Frank Act. Applicants whose incomes vary from month to month or those with other unique circumstances may qualify for these types of mortgages.

A lender may instead decide to offer you a nonqualified mortgage. If a lender offers you a nonqualified mortgage, it doesn’t mean they aren’t required to do any verification or assessment of your ability to repay the loan. It just means that you don’t meet the specific criteria needed for a qualified mortgage.

There are three main reasons borrowers look for a nonqualified mortgage are:

  • Limited documentation
  • DTI of greater than 43%
  • Interest-only loans

Interest rates on loans will vary from lender to lender, but you may find that a Non-QM will have higher interest rates. 

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