QM vs. Non-QM Mortgages: What’s the Difference?

A couple is meeting with a loan officer to discuss their options between QM vs. non-QM mortgages.

Your Guide on What You Need to Know About QM and Non-QM Mortgages

Navigating the process of homeownership can be overwhelming, especially when it comes to financing. Before even thinking of home shopping, understanding your mortgage options should come first. Two key terms you’ll most likely come across are QM vs. non-QM mortgages – but what exactly do they mean? While QM loans tend to dominate the mortgage market, non-QM loans cater to an underserved demographic, representing about 4% of the first mortgage market

If you’re just starting out your homeownership journey and want to learn about the differences between QM vs. non-QM mortgages, you’ve come to the right place. In this guide, we’ll be covering the ins and outs of both types of mortgages, from the basic definitions and pros and cons of each.  

What Does QM and Non-QM Mean?

Let’s get started by breaking down QM and non-QM loans. QM stands for “qualified mortgage” and follows stricter guidelines. They usually require a strong credit score, a manageable debt-to-income ratio (DTI), and documented income like pay stubs, W2s, and tax returns. 

On the other hand, non-QM, or “non-qualified mortgage,” offers more flexibility. They usually accept lower credit scores or higher DTI, and consider alternative income verification for self-employed individuals. 

Simply put, QM offers a more traditional route, while non-QM caters to borrowers who might not qualify for a typical mortgage.

What is a Qualified Mortgage?

A qualified mortgage loan (QM loan) meets all the consumer protection requirements of the Consumer Financial Protection Bureau (CFPB). Borrowers must have a reasonable debt-to-income ratio (DTI), and mortgage lenders can’t offer mortgage products with artificially low introductory monthly payments that sharply increase when the teaser period ends.

A top-down view of someone preparing their tax return, which is one of the main differences between QM vs. non-QM mortgages.

What Are the Qualified Mortgage Standards?

To give you a better understanding of how qualified mortgages work, here’s a breakdown of the key standards that QM lenders are required to follow:

  • Ability-to-Repay Rule: This rule requires lenders to make a good faith effort to assess your ability to repay the loan. This involves looking at your income, debt, and overall financial situation.
  • Debt-to-Income Ratio (DTI): Generally, QM loans have a maximum DTI of 43%. This means your total monthly debt payments (including things like car loans, credit card payments, etc.) shouldn’t exceed 43% of your gross monthly income.
  • Credit Score: While specific minimums vary by lender, QM loans typically require a good credit score, often ranging from 620 or higher. 
  • Documentation: You’ll need to provide proof of income (pay stubs, W2s, and tax returns) and employment verification. Asset verification might also be required.
  • Loan Features: QM loans generally avoid features deemed risky, such as negative amortization where your loan balance increases over time.

What is a Non-Qualified Mortgage?

A non-QM loan is a type of mortgage that doesn’t conform to the lending criteria set by the Consumer Financial Protection Bureau (CFPB). Unlike QM loans, non-QM mortgages may have more flexible lending standards, allowing borrowers with non-traditional income sources or unique financial situations to obtain financing using alternative income documentation. 

Non-QM Mortgage Options

The term “non-QM” is an umbrella term that covers several loan types. These loans are tailored to fit the needs of borrowers with different circumstances, and each have different requirements. Below, we’ve outlined the most common non-QM mortgage options:

  • Bank Statement Loans: For those with non-traditional income. Use your personal or business bank statements to qualify.
  • P&L Loans: For business owners. Use your business’ P&L statements to qualify. 
  • DSCR Loans: For real estate investors or anyone looking to purchase an investment property. Use your investment property’s income to qualify. 
  • Interest-Only Options: For those who are looking for a lower monthly payment to improve cash flow or expect their income to increase in the near future. Interest-only period lasts for five to 10 years before the mortgage is fully amortized. 
  • Asset Depletion Options: For high-net-worth individuals or those who have significant investments. Use your liquid assets in lieu of income to qualify. 
  • Foreign National Loans: For foreign nationals who are non-US citizens or non-US permanent residents. No US credit score is required. 
  • Fix-and-Flip Loans: For home flippers or those rehabbing a home. Uses historical experience to qualify. 
  • Construction Loans: For those looking to build a property from the ground up. Uses historical experience to qualify.  

Who Would Benefit From a Non-QM Mortgage?

Non-QM loans can be a great tool for a wide demographic of borrowers. Anyone who has trouble qualifying for a QM loan would benefit significantly from a non-QM mortgage. This could include, but is not limited to self-employed individuals looking for a mortgage, entrepreneurs, retirees and more. Check out the full list:

  • Gig workers 
  • Entrepreneurs 
  • E-commerce Professionals 
  • Individuals With Multiple Streams of Income
  • Influencers
  • Freelancers 
  • Consultants
  • Independent Contractors/1099
  • Small Business-owners
  • Self-employed Individuals 
  • Artists 
  • Real Estate Investors
  • Truck Drivers   
  • Bad Credit Borrowers

An artist, who would benefit from learning the differences between QM vs. non-QM mortgages, is creating a painting in her workshop.

Summary of QM vs. Non-QM Mortgages

FactorsQMNon-QM
DefinitionA type of mortgage that meets all the consumer protection requirements of the Consumer Financial Protection Bureau (CFPB).A type of mortgage that doesn’t conform to the lending criteria set by the Consumer Financial Protection Bureau (CFPB).
BenefitsWider availability, reduces the risk of predatory lending, and lower interest rates. Opens up the door to homeownership, tailored options to fit borrower’s needs, and no tax returns typically required.
Ideal CandidateSomeone with a traditional job who also has a strong credit score and financials.Someone who has a non-traditional income stream and faces challenges proving their income. 
Interest RatesCompares closely to the 30-year fixed rate. Slightly higher than conventional rates. 
Loan OptionsConventional loans, FHA loans, and VA loans. Bank statement loans, DSCR loans, P&L loans, asset depletion options, foreign national loans, interest-only options, fix-and-flip loans, and construction loans. 

QM vs. Non-QM Mortgages FAQs

  1. What is a QM mortgage?

A QM mortgage stands for “qualified mortgage”, which meets all the consumer protection requirements of the Consumer Financial Protection Bureau (CFPB). Typically, these lending standards are quite strict and there is little room to stray away from the set criteria. 

  1. What is a non-QM mortgage?

A non-QM mortgage stands for “non-qualified mortgage”, which means it doesn’t conform to the lending criteria set by the Consumer Financial Protection Bureau (CFPB). This flexibility allows non-QM lenders to create unique lending products with their own set criteria to open up the door to homeownership for underserved borrowers who can’t qualify for QM loans. 

  1. What’s the difference between QM vs. non-QM mortgages?

The main difference between a QM and non-QM mortgage are the lending standards. QM lending standards are strict due to the Consumer Financial Protection Bureau (CFPB) criteria that QM lenders have to follow. Whereas non-QM mortgages aren’t required to abide by these rules, so non-QM lenders have more leeway with setting qualification requirements. 

  1. What are the different non-QM mortgage options?

Non-QM mortgages come in many different forms, each of them designed to fit the needs of various types of people. Non-QM mortgage options include:

  • Bank statement loans
  • Profit & loss (P&L) loans
  • Foreign national loans
  • DSCR loans
  • Asset depletion options
  • Fix-and-flip loans
  • Construction loans
  • Interest-only options
  1. Are non-QM mortgages safe?

Yes! Non-QM mortgages are safe as long as you choose a reputable and experienced lender. 

  1. Should I get a QM or a non-QM mortgage?

The answer to this question depends on your specific situation. For example, if you don’t work a traditional job, it can be difficult to prove your income for a QM loan. In this case, non-QM loans will be your best bet with a higher chance of qualifying. Same thing for if you are a real estate investor, retiree, entrepreneur, freelancer, foreign national, anyone who claims business write-offs on their tax returns, etc. 

  1. Who would be a good candidate for a QM mortgage?

A good candidate for a QM mortgage is someone who works a traditional job and has access to income documents like pay stubs, W2s, and tax returns. QM lenders tend to look at those documents along with other factors such as credit score, employment history, debt-to-income (DTI) ratio, and more. 

  1. Who would be a good candidate for a non-QM mortgage?

Like mentioned above, a good candidate for a non-QM mortgage is someone who doesn’t have a traditional income stream, making it challenging to provide the required documentation for a QM loan. Non-QM loans have less strict qualification requirements, which allows borrowers to demonstrate their income in different ways. 

  1. What are the requirements for QM vs. non-QM mortgages?

Specific requirements for a QM and non-QM mortgage will depend on factors like the lender and the loan option you choose to take. Each lender does their own due diligence and depending on the loan type under each category, requirements may vary. For example, a conventional loan will have different requirements than an FHA loan despite both being QM loans, and a bank statement loan will have different requirements than a DSCR loan despite both being non-QM loans. We recommend doing your research on each lender and their requirements for the loan options you’re interested in to get a better idea of what you may need. 

  1. Where can I get a non-QM mortgage?

Non-QM mortgages are usually offered by alternative lenders, like us! Defy offers multiple non-QM options to choose from. Contact us today and we can help you find the right fit for you. 

  1. Do banks have non-QM mortgages?

The big banks do not offer non-QM mortgages. The good news is that that is where we at Defy Mortgage come in. 

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