Non-qualifying, or non-qualified loans—commonly referred to as Non-QM loans—give borrowers a more flexible format of mortgage structuring. They feature less strict credit and financial profile qualifying prerequisites and are typically strong options for self-employed loan seekers, certain rental property owners and others who are otherwise unable to meet the stringent standards for conventional mortgage financing. Here are three important things you need to know if you are in the hard money lending industry and are considering utilizing a Non-QM loan in the near future.
Need-to-Know #1: Why the ‘Non-Qualifying’ Moniker?
Non-QM mortgages do not adhere to the lending standards established by the Dodd-Frank Act. These guidelines were implemented in 2014 to make sure debtors had the capacity to repay their loans and to safeguard against another subprime mortgage disaster that was experienced during the Great Recession. Accordingly, Non-QM loans are ineligible for purchase by Freddie Mac or Fannie Mae and do not feature the government backing that distinguishes FHA and VA loans. That is not to say that there are absolutely no rules when it comes to Non-QM loans. They are still subject to the “Ability to Repay Rule.” This means that unless a lender goes out of its way to determine that an applicant is able to repay their debt, they are vulnerable to future lawsuits. While they are safe mortgage options for borrowers, they still often carry a higher risk profile from a lenders’ perspective and thus have higher interest rates. Still, the trade off can be worth it, as Non-QM lenders will often consider factors beyond the standard approval checklist and view the loan application from a more holistic viewpoint.
Need-to-Know #2: Streamlined Procedural Requirements
Non-QM loans often require far less in the way of formal documentation when compared to other types of loans. Lenders that offer this type of financing generally do not ask borrowers to provide items such as W-2s, tax returns or an employment verification form on these mortgage packages—though technically they will mandate that the borrower provide some form of income verification as part of the approval process but can be more flexible as to what they accept. Keep in mind that not all lending entities offer Non-QM mortgages. You will have to check with the banks and credit unions in your specific area. Just be aware that lenders can alter their loan products often and many have chosen not to offer them since the onset of the COVID-19 pandemic. Still, the expedience of the entire process coupled with the more lenient terms may make the search for a provider well worth it in the long run when looking for financing.
Need-to-Know #3: Non-QM Loans are Geared Towards Certain Uses
Non-QM financing is perfect for when you have regular income to make timely mortgage payments but don’t have the type of credit profile needed to obtain traditional financing. They are also ideal for real estate investors whose income over some months is high and others is low depending on transaction activity and market conditions. These individuals have no real way of accurately predicting how much they will earn from year to year, but they also do not have trouble paying their bills as their credit score is healthy and they have savings in their bank account. Still, they are unable to fill the income verification requirements for qualified mortgage financing. That’s where Non-QM comes in handy. The following are some additional instances where this type of loan package makes a lot of sense:
Self-Employed (e.g. real estate investors)
To put it simply, in any case where the borrower generates income and has the assets to make regular, on-time mortgage installment payments but is otherwise unable to obtain traditional financing for some reason, then a non-QM loan is a great choice for financing.
Alpha Funding partners is a hard money lender based in New York and New Jersey. We offer a variety of loan programs including Non-QM loans and would love to learn more about your next investment opportunity. Alpha Funding Partners offers the best combination of rates and leverage. We pride ourselves in our fast turnaround times, quicker closings, customer service, and our experience in the industry. Reach out to Alpha Funding Partners today to learn more about obtaining your next hard money loan.