A Qualified Mortgage (QM) is a category where loans are more stable, with well-defined requirements. It is primarily intended to assist individuals who have been proven to afford a loan. The lender makes that effort to really determine that you, the borrower, have the financial ability to repay your mortgage even before you take it out. It does so by looking at documents like bank statements or a credit score report.

A Nonqualified Mortgage (non-QM), on the other hand, is the category that covers all those loans that don’t fit the QM characteristics. Therefore, it accommodates people who do not have the standard documentation to prove that they are capable of making those mortgage payments. If you do not fit into the conforming model but still have the credentials like sizeable assets or a big, if sporadic income, you can qualify for a non-QM.

Non-QM Scenarios

Here are some reasons to get an outside the box, Non-QM loan:

• Self-employed for less than 2 years
• Self-employed and not showing a great amount of income on tax returns
• High debt ratio yet plenty of reserves to make up for the debt ratio
• Blemished credit due to unforeseen circumstances during the downfall of the economy

Immediately following the housing crisis, loans for borrowers in any of these predicaments was hard to find, but they are more readily available today by a variety of lenders.

Ability to Repay Rule

It needs to be stressed that a non-qualified loan does not mean you cannot repay the loan. The lender is still going to do due diligence in evaluating your financial situation. They will not provide loans to borrowers that do not demonstrate the ability to repay the loan. The Ability to Repay Rule put into place by the Dodd-Frank Act, requires lenders to ensure that borrowers can afford the loan.

This means:

• Verifying income and asset
• Verifying employment
• Accurately calculating the debt to income ratio
• Evaluating credit history

Lenders, such as us, are able to charge higher interest rates and/or fees for loans that pose a slightly higher risk than a Qualified Mortgage would allow, yet they must make sure the payment is affordable. What this means is the days of stated income and stated asset loans are gone. Lenders need solid proof that the borrower can afford the loan with slightly higher rates and/or fees with ease. They are not supposed to put borrowers in a difficult financial situation.