- A non-QM loan is a mortgage that doesn’t meet the Consumer Financial Protection Bureau’s Qualified Mortgage standards — typically because of unusual income documentation, credit issues, or non-standard loan features.
- Non-QM loans can be a good fit for self-employed borrowers, gig workers, and real estate investors, but they come with higher interest rates and fewer consumer protections.
- If you’re unsure whether you need a non-QM loan, it’s worth checking whether you qualify for a conventional or FHA refinance first — those programs often have more flexibility than borrowers expect.
Most loans are relatively straightforward — fixed terms, interest rates at prevailing market rates, or adjustable-rate options for borrowers who want more flexibility. But some borrowers don’t fit neatly into those boxes. An irregular income stream, past credit issues, or the need for non-standard loan features can make traditional financing difficult to obtain.
In those circumstances, a non-qualified mortgage — commonly called a non-QM loan — may be worth exploring.
What is a Non-QM Loan?
A non-QM loan is a mortgage that doesn’t meet the standards outlined in the Qualified Mortgage rule adopted by the Consumer Financial Protection Bureau in 2014.
To meet Qualified Mortgage standards, lenders must document a borrower’s income, employment status, credit, debts, and assets to confirm they can afford to repay the loan. The loan’s terms must also be straightforward — no interest-only payments, no large balloon payments due after a set number of years.
Borrowers with hard-to-document income or past credit blemishes are considered higher risk. Non-QM loans accommodate those situations with different terms — but that flexibility comes at a cost.
Good Candidates for Non-QM Loans
Some borrowers seek out non-QM loans specifically for their features. Interest-only loans — where payments cover only interest, not principal — must be structured as non-QM. The same applies to negative amortization loans, where the monthly payment is less than the interest accruing that month. Longer loan terms, such as 40-year mortgages, also fall into the non-QM category.
Non-QM loans are considered riskier, and their terms reflect that. But they may make sense for certain borrowers — for example, someone who plans to move within a few years or expects a significantly higher income down the road might benefit from the lower monthly payments that come with an interest-only structure.
Common non-QM borrower profiles include:
- Business owners and the self-employed
- Gig economy workers with irregular income
- Tech employees whose compensation is primarily stock-based
- Real estate investors with multiple properties
Pros of Non-QM Loans
- Opens up financing to borrowers who don’t qualify for traditional mortgages
- More accommodating of past credit issues like bankruptcy or collections
- Accepts irregular or hard-to-document income streams
- Tax returns and W-2s are often not required
- Offers terms and features not available with QM loans, such as 40-year amortization
- Streamlined applications can result in closings in 30 days or less
- May allow debt consolidation through a single mortgage payment
- QM loans cap the debt-to-income ratio at 43%, but non-QM loans can exceed that threshold
- Borrowers typically must wait 7 years after a foreclosure to qualify for a QM loan; non-QM loans may be available much sooner
- Owning multiple properties is less likely to count against you
Cons of Non-QM Loans
- Interest rates are typically 1–2% higher (or more) than QM loans
- Harder to qualify for and harder to find lenders who offer them
- May require a down payment of up to 20%
- Lenders must still verify that borrowers can afford monthly payments
- Non-QM loans are held on the lender’s books rather than sold to Fannie Mae or Freddie Mac
- Fewer consumer protections than qualified mortgages
- Self-employed borrowers or those relying on commissions and bonuses may need to show two to three years of earnings history — though recent rule changes allow some borrowers to use bank deposit records in place of tax returns
What is the QM Rule?
The QM rule — sometimes called the “ability-to-repay” rule — is designed to prevent lenders from selling mortgages with features that make them likely to become unaffordable. Mortgages with these so-called “toxic” features were widely blamed for fueling the housing bubble and the financial crisis that followed.
To qualify as a QM loan, a mortgage cannot include negative amortization, balloon payments, or interest-only features. Lenders who originate QM loans also receive certain legal protections in the event of foreclosure — specifically, borrowers cannot sue them on the grounds that they were sold an unaffordable loan. That protection allows lenders to offer QM loans at lower interest rates.
QM loans are also capped at 3% in fees. Non-QM loans carry no such cap, which means lenders can charge higher fees to offset the additional risk associated with these borrowers.
Not Sure Which Loan Type Fits? Start Here.
Non-QM loans serve an important role for borrowers who fall outside standard lending guidelines. But before assuming you need one, it’s worth finding out whether a conventional or FHA refinance might work for you — these programs can be more flexible than many borrowers expect, and they typically come with lower rates and stronger consumer protections.
If you’re looking to refinance, get started with Refi.com to see what you may qualify for. It only takes a few minutes and won’t affect your credit score.
