Non-QM loans: home loans for people whose income doesn't fit the usual boxes

What is a Qualified Mortgage (QM)?

Federal law requires lenders to make a reasonable, good-faith decision that you can repay a home loan. The CFPB put that rule in Regulation Z at 12 CFR 1026.43. It's called the Ability-to-Repay/Qualified Mortgage (ATR/QM) rule.

The Ability-to-Repay part covers most consumer-purpose, closed-end loans secured by a home. The rule lists eight things a lender must consider:

• Current or reasonably expected income or assets (other than the home itself)
• Current employment status, if the lender relies on job income
• The monthly payment on the new loan
• The payment on any loan taken out at the same time, like a second mortgage
• Mortgage-related costs such as taxes, insurance and HOA dues
• Current debts, alimony and child support
• The monthly debt-to-income ratio (DTI: how much of your monthly income goes to debt payments) or residual income (money left over each month after bills)
• Credit history

A Qualified Mortgage is a type of loan that meets extra product limits. In return, the lender gets legal protection: either a safe harbor or a rebuttable presumption that it met the ATR rule. Under the general QM definition, the loan can't have negative amortization (a balance that grows), interest-only payments or (with narrow exceptions) a balloon payment. The term can't be longer than 30 years, and points and fees must stay under a cap.

Is there still a 43% DTI limit?

No. The general QM definition used to include a hard 43% debt-to-income limit and the Appendix Q income rules. The CFPB replaced them with a price-based test in a final rule published December 29, 2020, effective March 1, 2021, with mandatory compliance starting October 1, 2022. Now a first-lien loan generally fails the general QM test if its APR is 2.25 percentage points or more above the Average Prime Offer Rate for a similar loan, with higher thresholds for smaller loans. Lenders must still consider and verify DTI or residual income, but the rule sets no single DTI ceiling.

What is a Non-QM loan and how does it work?

A Non-QM loan is any covered loan that falls outside the QM definitions. It might not qualify because it's interest-only, because the term is longer than 30 years, because it's priced above the APR threshold, or because the way income is shown doesn't match agency rules.

One detail: Regulation Z exempts business-purpose credit. CFPB commentary treats a loan on rental property the owner won't live in as business-purpose. That's why many DSCR investor loans are approved based on the property's rent. The federal ATR rule generally doesn't apply to them, though lenders still apply their own standards.

Non-QM loans aren't sold to Fannie Mae or Freddie Mac, or backed by FHA or VA. Private investors set the rules, so two lenders can treat the same file very differently.

Who is a Non-QM loan good for?

These are the situations where Non-QM most often makes sense:

• Bank statement borrowers. Self-employed people whose tax returns show much less income after legal write-offs. Income is figured from bank deposits. See bank statement loans.
• 1099 earners. Independent contractors qualified from their 1099s, often with an expense factor (a set share subtracted for business costs).
• P&L borrowers. Some programs use a profit and loss statement prepared or checked by a CPA or tax preparer.
• Asset depletion or utilization. Borrowers with large savings and investments but modest income, such as retirees. The lender turns eligible assets into qualifying income using a formula.
• DSCR investors. Investors who qualify on the property's rent compared with its payment instead of personal income. See DSCR loans.
• Recent credit problems. Borrowers still inside the agency waiting periods after a bankruptcy, foreclosure, short sale or deed-in-lieu.
• Foreign nationals and ITIN borrowers. People without a Social Security number or U.S. credit history.
• Interest-only seekers. Borrowers who want an interest-only period for cash flow. That feature alone makes a loan non-QM.

Self-employed? Start with my self-employed mortgage guide.

How do you qualify for a Non-QM loan?

Each lender writes its own rules, but the common themes are:

• Credit score. Scores still affect pricing and eligibility. Lower scores usually mean higher cost, more equity required, or both.
• How income is figured. Bank statement programs usually average deposits over a set number of months and may apply an expense factor. DSCR programs compare rent to the full payment, including taxes, insurance and HOA dues. You can test that ratio with my DSCR calculator.
• Reserves. Many Non-QM programs want to see several months of payments in savings after closing.
• Property type. Condos, multi-unit, short-term rental and rural properties may have extra conditions.
• Time since credit problems. Most Non-QM lenders still want some time to have passed since a major credit event.

What documents do I need for a Non-QM loan?

The list depends on the program, but plan on some mix of:

• Personal or business bank statements for the months the lender reviews
• Proof you own the business and how long it's been open (a license, CPA letter or state registration)
• 1099 forms, or a P&L statement if the program uses one
• Account statements for down payment, closing costs and reserves
• For DSCR: leases or a market rent estimate from the appraiser, and often LLC papers if closing in an LLC

Alternative documentation doesn't mean less review. It means a different kind of review.

How much do I need for a down payment on a Non-QM loan?

In my experience, Non-QM loans generally require more of your own money in the deal than agency loans. Lenders balance the extra risk of non-traditional income or a recent credit problem by asking for a larger down payment on a purchase, or more equity left over on a refinance. The amount usually depends on your credit score, the program, the property type and the loan size.

Gift money and seller credits may be more limited than in agency programs. My down payment calculator can help you plan once we know the program's requirement.

Non-QM loan pros

• Qualifies you on the income you actually have, not what a tax return shows after deductions.
• Lets investors qualify on the property's cash flow instead of personal DTI.
• Can shorten the wait after a credit problem compared with agency waiting periods.
• Offers setups agency loans can't, like interest-only periods or closing in an LLC.

Non-QM loan cons

• Higher cost. Rates and fees are usually higher than a similar conventional, FHA or VA loan because investors take more risk.
• More money down or more equity. As noted above, expect stricter loan-to-value limits (limits on how much you can borrow compared with the home's value).
• Prepayment penalties on investor loans. A prepayment penalty is a fee for paying off the loan early. Federal rules sharply limit them on consumer-purpose loans: they're allowed only on certain fixed-rate QMs that are not higher-priced, and capped in size and time. Business-purpose DSCR loans fall outside those rules, and prepayment penalties are common there. Know exactly how yours works before you sign.
• Escrow requirements. If a first-lien consumer loan is a higher-priced mortgage loan under Regulation Z, the lender generally must set up an escrow account for taxes and insurance. You can't ask to cancel it until at least five years after closing.
• Rules vary and change. A program available today may tighten or go away.

How do I compare Non-QM loan offers?

1. Compare Loan Estimates, not rate quotes. Look at the APR, origination charges and any discount points.
2. Find the prepayment penalty. On business-purpose loans, get the terms in writing.
3. Ask how income was figured. Which months, which accounts, what expense factor?
4. Check for adjustable or interest-only features and what the payment becomes when they end.
5. Know your exit plan. If you hope to refinance into an agency loan later, make sure the penalty and costs allow it.
6. Confirm reserves and cash to close early.

Could a conventional, FHA or VA loan work instead?

Before I quote Non-QM, I check whether an agency loan works, because it usually costs less. For example:

• Self-employed with a shorter track record. Fannie Mae generally wants a two-year history. But it can accept as little as 12 months of self-employment on the most recent tax returns when the borrower earned similar income in the same field before.
• Self-employed with a long track record. Fannie Mae can accept one year of returns when the business has existed for five years and the borrower has owned at least 25% of it for those five years.
• Past credit problems. Fannie Mae's waiting periods are 4 years after a Chapter 7 bankruptcy, 2 years after a Chapter 13 discharge, 7 years after a foreclosure, and 4 years after a short sale or deed-in-lieu. Shorter periods apply for documented extenuating circumstances. FHA and VA have their own rules. If you're already past the waiting period, an agency loan may be on the table.
• Thin credit. Fannie Mae's Desktop Underwriter can give credit for steady rent payments found in your bank statement data.
• Veterans. VA loans offer some of the most flexible down payment terms available and don't carry monthly mortgage insurance.

See conventional loans for more on the agency route.

QM vs. Non-QM: what's the difference?

Common questions about non-qm loans

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