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Non-QM Loans — what do you need to know?
Over the past decades, the housing market and the entire financial sector have changed significantly. Non-QM mortgage loans, also known as non-qualified mortgages, have become significantly different from QM's.
A qualified mortgage (QM) loan meets the requirements established by the Consumer Financial Protection Bureau (CFPB) in 2014. A borrower's salary, credit history, and debt-to-income ratio are just some metrics considered when assessing whether a borrower meets loan criteria. However, not all borrowers qualify for a QM loan. Therein lies the utility of non-QM loans.
Borrowers who do not meet the strict criteria for a qualified mortgage can obtain non-QM mortgages. Along with this, they will also receive greater freedom of action. But let's look at this issue in more detail.
How does a non-QM mortgage in Illinois work?
So, we know that qualified mortgages must meet strict underwriting requirements. But, non-QM mortgages are not subject to these rules or the same regulatory restrictions as QM loans. Thus, qualified loans set strict standards for the borrower's income, credit score, and debt-to-income ratio.
If you are self-employed, have experienced bankruptcy or a short sale, or have high equity but low income, you may be interested in a non-QM mortgage loan.
In the case of such loans, the lender uses non-traditional standards of verifying income — for example, the borrower's assets, employment record, and other similar factors. Remember that the lender perceives a non-QM loan as a potential risk, so prepare for high-interest rates and large down payments.
Let's take a closer look at the terms and conditions of non-QM — so you can make a thoughtful and informed decision.
Benefits of a non-QM loan
- Flexible underwriting criteria is the main advantage. Non-QM mortgage loans have a more lenient approach to income and debt-to-income ratio.
- A good option for underbanked populations — Non-QM will definitely be of interest to people who have not received approval for a regular mortgage.
- Faster loan processing — non-qualified loans are processed faster, and the borrower may be able to close on the loan and begin occupying the property sooner.
- Customizable loan options — the flexibility of loans allows them to be adapted to the specific set of financial requirements of each client.
Qualified vs. Non-qualified mortgages
- Underwriting Criteria — Qualified loans require a maximum debt-to-income (DTI) ratio of 43%, proof of the borrower's income and assets, and prohibitions on loan features, including negative amortization and balloon payments. On the other hand, non-QM loan loans have softer standards — borrowers with larger DTI ratios and alternative income evidence can apply for them.
- Consumer protection — the CFPB has specific rules that reduce the likelihood of loan defaults and servicing abuses. For example, lenders must know about the borrower's ability to repay the loan. In contrast, the Homeownership Protection Plan mandates that lenders offer information on avoiding foreclosure. Non-QM loans are not required to follow these rules and may present a higher risk of default and abuse in loan servicing.
- Interest Rates — Qualified loan rates may be cheaper because the lender takes less risk. Non-QM Loan rates are higher due to higher risk.
- Loan options — FHA, VA, and USDA loans are just a few loan programs that may be available to QM borrowers. Non-QM Loans may require a more specific type of borrower to meet specific criteria — such as a stated income loan, an asset-based loan, or an interest-only loan.
Requirements for Non-QM Loans in Illinois
Of course, requirements will vary from lender to lender, so it's important to carefully review your loan offer to ensure it meets your financial needs and goals. Basically, the requirements include the following parameters.
- Credit Score — You need a score between 620 and 680 for qualified loans. Lenders with Non-QM Loans consider borrowers with low credit scores and review each application separately.
- Income documentation — Non-QM Loans use alternative methods of income verification. For example, bank statements or asset depletion, instead of traditional pay stubs and W-2s. As a result, it helps self-employed borrowers or borrowers with non-traditional incomes obtain a loan.
- Debt-to-income (DTI) ratio — Non-QM Loans offer higher ratios than qualified loans, where the minimum DTI ratio is 43%.
- Loan-to-value (LTV) ratio — Non-QM Loans have higher rates LTV ratios than qualified mortgages. So, borrowers can finance a higher percentage of the home's value.
If you're looking to buy a new home, but traditional mortgages don't fit your financial circumstances, try looking at Non-QM Loans. With the LBC Mortgage team by your side, you'll receive help at every step. Even if you have unique circumstances or a low credit score, we can still help you find the best loan option for your specific situation. Together, we can find a solution that perfectly suits your needs.
At LBC Mortgage, we focus on personalized service and approach each client's case individually. Sign up for a free consultation, and we'll walk you through the entire application process!
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