How to Apply for a Non-Qualified Mortgage

Since the 2008 recession, traditional mortgage lenders have had to tighten lending criteria. In many ways, this is good for borrowers as unethical lenders won't pressure them into taking on mortgages they can't afford. But, it also means that anyone without traditional employment income and pay stubs to prove it can have difficulty qualifying for a mortgage. 

Non-qualified mortgages solve this problem, offering freelancers, small business owners and individuals with a lower credit score or fluctuating income to buy a home. Read on for benefits, non-QM loan requirements and how to apply for a non-qualified mortgage.

What Is a Non-Qualified Mortgage?

Non-QM loans or non-qualified mortgages are a type of mortgage product that isn't required to meet the Consumer Financial Protection Bureau's agency-standard documentation requirements. Non-QM loans meaning varies. These mortgages may take forms including bank statement mortgages or mortgages for self-employed individuals, making it easier for a wide swath of the population to qualify.

Non-QM loans:

• Can exceed the CFPB’s current price-based thresholds
• Have flexible loan eligibility requirements
• Accept lower credit scores 
• Can approve higher debt-to-income (DTI) ratios
• Accept other forms of proof of income (like bank statements)
• Can exceed 30-year terms
• Can have negative amortization
• Can offer interest-only payments

A non-QM mortgage isn't backed by government agencies like FHA, VA, Fannie Mae and Freddie Mac.

Differences Between Qualified and Non-Qualified Mortgages

The differences between qualified and non-qualified mortgages come down to qualification requirements and backing. One or more government agencies back a qualified mortgage; it must meet standards set out by the Consumer Financial Protection Bureau. Because of strict qualification requirements, many individuals without standard employment income or a low credit score may have difficulty buying a home. 

For qualified mortgage loans, up to 43% of the borrower's income can go towards the loan. For non-QM loans, the debt-to-income ratio can be higher. Qualified loans also have limits on upfront costs and fees and can't extend beyond 30 years. 

A non-QM loan may have more lenient standards, including a higher debt-to-income ratio, longer loan terms, or unusual income sources. Some individuals who can benefit from a non-qualified mortgage include:

• Business owners
• Freelancers
• Self-employed
• Real-estate investors
• Retirees
• Gig workers
• Individuals with high debt
• Those with a low credit score
• Foreign nationals
• People with high assets and low income

Benefits of Getting a Non-Qualified Mortgage

If you don't meet the criteria for a qualified mortgage, lenders may offer you a non-qualified mortgage. There are significant advantages, including: 

Flexible Requirements

Non-QM loan requirements are less stringent than traditional mortgages. For example, if you're a freelancer or business owner whose income varies from month to month, you'll have a hard time qualifying for a traditional mortgage. However, if you can demonstrate income through bank statements, you could get a non-qualified mortgage like a bank statement mortgage. Individuals working to raise their credit score or lower debt who can't meet traditional mortgage requirements can also benefit from more lenient requirements for a non-QM loan. 

High Loan Amounts

If you're looking to buy your dream home that will require more than 43% of your income in monthly down payments, a non-QM loan could be the solution. Non-QM loans can offer higher total loan amounts, even if it exceeds standard debt-to-income ratio limits. The lender will still do due diligence, but if you can offer a strong case, you may qualify for higher loan amounts. You can also use a non-qualified mortgage to purchase a second home or investment property, even if it significantly increases your debt. 

Similar application process

It's no more difficult to apply for a non-qualified mortgage than a traditional mortgage loan. You can also get similar interest rates, depending on your financial profile. This means you won't need to overcome additional obstacles to qualify for a non-qualified mortgage. 

Potential Drawbacks of a Non-Qualified Mortgage

Non-qualified mortgages aren't without risks, especially since they aren't backed by the Consumer Financial Protection Bureau or government agencies like FHA, VA, Fannie Mae and Freddie Mac. They may have higher interest rates, higher fees or fewer consumer protections. Non-QM loans also have limited refinancing options or loan modification opportunities. In other words, once you take out a non-qualified mortgage, you may be locked into that rate until you pay it off or sell the home. 

How Do I Apply for a Non-Qualified Mortgage?

If you're ready to apply for a non-QM loan, follow a few simple steps for how to apply for a non-qualified mortgage:

1. Determine Your Eligibility

Since non-QM loans have more lenient requirements, eligibility requirements may vary by lender. Prepare documents, including proof of income such as bank statements, pay stubs, or tax returns and business documents. You'll also need to bring basic personal information, including ID and social security number. 

Lenders are looking for financial stability and reliability. They can use income proof like pay stubs or bank statements to verify this, along with credit scores, additional income streams and savings accounts, investment accounts or assets.

2. Research Non-Qualified Mortgage Lenders

You can search for a non-QM lender online or locally. Be sure to research, read reviews and read the fine print before deciding on a lender. To get started with the mortgage process, find the best non-QM lenders or mortgage lenders that do not require tax returns. 

3. Gather Required Documents

Be sure to gather all the documents you may need ahead of time. This includes:

• Income verification
• Income tax returns and other income documents
• Pay stubs
• Bank accounts statements
• Business documents
• Valid government-issued ID
• Verification of current residence (like a utility bill)

With this documentation, most lenders will require you to fill out a simple application that asks about income, debt and other financial obligations. 

4. Complete Your Application

To complete the application, you'll need to follow your specific lender’s instructions for submitting and completing the application. Check all information requested to ensure you've submitted everything they require. Also, double-check the terms mentioned in the mortgage application.  

5. After the Home Loan Is Approved

Once you've been accepted for a non-QM loan, your ongoing obligations will primarily involve making mortgage payments on time. It's also important to monitor your credit score and manage debt to ensure that your finances remain stable. Before taking out the loan, it's important not to accept a mortgage larger than you can comfortably pay off each month to reduce the risk of default.

Tips for Getting Approved for a Non-Qualified Mortgage

To get approved for a non-qualified mortgage, you'll want to be sure your finances are in good order. Here's a checklist.

Improve Your Credit Score

The higher your credit score, the greater the chance of mortgage loan approval. A credit score of 700 or above is considered good. A score of 740-plus is very good. While you can be approved for a non-QM loan with a lower credit score, you'll pay more in interest over the lifetime of the loan.

You can boost your credit score before applying by paying off debt (especially credit card debt), using a rent reporting company to get credit for past on-time payments of rent and utilities or becoming an authorized user with someone with a higher credit score. Long term, the best way to boost your credit score is to make on-time debt payments without missing a payment and to pay off as much debt as possible. 

Consider Your Debt-to-Income Ratio (DTI)

Your debt-to-income ratio is the ratio of earnings to total debt, including monthly expenses like housing and utilities. For example, if you make $7,000 a month, and your regular expenses total $4,000 monthly, your DTI ratio is 57%. 

That would be too high to qualify for a traditional mortgage loan (where the limit is 43%). While you may qualify for a non-qualified mortgage, lowering your debt-to-income ratio will increase your chances of approval. 

Be Transparent About Your Finances

It is important not to hide part of your expenses for the good or the bad. In most cases, lenders will look into your finances and find what you omitted. Instead, share total assets and income as well as total debt and expenses to increase your chances of approval for a mortgage you can afford. 

Securing a Home This Year

Homeownership offers additional financial security and the growth of a valuable asset as you repay the loan. With the steps above, it's clear that how to apply for a non-qualified mortgage is relatively straightforward. The more lenient requirements mean more people can step into home ownership. 

Be sure to research lenders and compare rates to secure the best interest rate with the lowest fees you can get. Read reviews and double-check terms, and you could be on your way to a dream home this year!

Frequently Asked Questions