QM vs NonQM Loans: Your Guide to Understanding Mortgage Types

For many homebuyers, navigating the world of mortgages can be overwhelming. With so many different loan products available, it can be difficult to know which one is the right fit for their financial situation. In this article, we'll explore the differences between QM (Qualified Mortgage) and Non-QM loan products to help uneducated homebuyers make more informed decisions.

What is a QM loan?

A Qualified Mortgage, or QM, is a type of mortgage that meets certain guidelines established by the Consumer Financial Protection Bureau (CFPB) in 2014. These guidelines were put in place to protect borrowers from the risky lending practices that contributed to the housing crisis of 2008.

QM loans are considered less risky because they have a number of features that make them more affordable and easier to understand. For example, they have a maximum debt-to-income ratio of 43%, which means that a borrower's monthly debt payments cannot exceed 43% of their gross monthly income. They also have limits on upfront fees and points, which can help prevent borrowers from being charged excessive fees.

Some common types of QM loans include

Fixed-rate mortgages: These loans have a fixed interest rate for the entire term of the loan, which is typically 15 or 30 years. This means that the borrower's monthly payment will remain the same for the life of the loan. (Conventional and FHA loan products are typical examples.)

Adjustable-rate mortgages (ARMs): These loans have an interest rate that can adjust up or down over time, based on market conditions. ARMs typically have lower initial interest rates than fixed-rate mortgages, but they can be riskier for borrowers because their payments can increase significantly over time.

FHA loans: These loans are backed by the Federal Housing Administration (FHA) and are designed to help low- and moderate-income borrowers qualify for mortgages. They have more lenient credit and income requirements than traditional mortgages, but they also require borrowers to pay mortgage insurance premiums (MIP) which were recently reduced by Federal Housing Administration!

What is a Non-QM loan?

Non-QM loans are mortgages that do not meet the guidelines established by the CFPB for QM loans. They are often used by borrowers who do not qualify for QM loans due to factors such as low credit scores, high debt-to-income ratios, or non-traditional sources of income, such as a bank statement loan.

Non-QM loans can be riskier for borrowers because they often have slightly higher interest rates than QM loans. They can also have more complex terms and features, which can make them harder to understand. This is why having an educated lender who knows what product is best for you can make or break someone’s financial standing in purchasing a home!

Some common types of Non-QM loans include

Interest-only mortgages: These loans allow borrowers to make interest-only payments for a certain period of time, usually 5-10 years. After that, the borrower must start making payments that include both principal and interest. Interest-only mortgages can be risky for borrowers because they do not build equity in their homes and can result in large balloon payments at the end of the interest-only period.

Jumbo mortgages: These loans are for amounts that exceed the limits set by Fannie Mae and Freddie Mac, which are government-sponsored enterprises that purchase mortgages from lenders.

Bank statement mortgages: These loans qualify a buyer not on income documents but on the amount of money in their accounts. All bank accounts are taken into consideration and ratios are based on the average monthly deposit and withdrawal ratio. These loans are great for someone with a higher bank account balance and sporadic employment or is self-employed.

Which loan is right for you?

Choosing the right mortgage loan depends on a number of factors, including your credit score, income, debt-to-income ratio, and the amount you want to borrow. If you have any questions regarding these or other loan products, please contact me below!