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What Are Non-QM Loans?
For creditworthy borrowers who don’t meet traditional lending requirements, a non-QM loan can provide a (more expensive) path to homeownership.
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Taylor Getler Writer | Home equity, first-time home buying, home warranties
Taylor Getler is a home and mortgages writer for NerdWallet. Her work has been featured in outlets such as MarketWatch, Yahoo Finance, MSN and Nasdaq. Taylor is enthusiastic about financial literacy and helping consumers make smart, informed choices with their money.
Michelle Blackford spent 30 years working in the mortgage and banking industries, starting her career as a part-time bank teller and working her way up to becoming a mortgage loan processor and underwriter. She has worked with conventional and government-backed mortgages. Michelle currently works in quality assurance for Innovation Refunds, a company that provides tax assistance to small businesses.
At NerdWallet, our content goes through a rigorous editorial review process. We have such confidence in our accurate and useful content that we let outside experts inspect our work.
Johanna Arnone Assigning Editor | Mortgage lenders, homebuying, home equity
Johanna Arnone helps lead coverage of homeownership and mortgages at NerdWallet. She has more than 15 years' experience in editorial roles, including six years at the helm of Muse, an award-winning science and tech magazine for young readers. She holds a Bachelor of Arts in English literature from Canada's McGill University and a Master of Fine Arts in writing for children and young adults. Practice making complicated stories easier to understand comes in handy every day as she works to simplify the dizzying steps of buying or selling a home and managing a mortgage. Johanna has also completed coursework in Boston University’s Financial Planning Certificate program. She is based in New Hampshire.
There are plenty of reasons someone may be financially ready for a mortgage but struggle to qualify. For example, a self-employed gig worker or retiree wouldn’t have W-2s or pay stubs to verify their income. Lenders typically rely on this information to measure the borrower’s ability to repay a “qualified loan,” based on standards set by the Consumer Financial Protection Bureau.
This doesn’t mean the borrower is out of options. Some lenders offer non-qualified mortgages — also called non-QM loans — to serve borrowers who don’t meet traditional lending requirements. Non-QM loans have their own distinct set of criteria, including flexible income and credit requirements. In exchange, borrowers may need to make a larger down payment and pay a higher interest rate.
Non-QM loans: flexibility at a cost
Non-QM loans are aimed at borrowers with financial profiles that don’t meet the requirements of a typical qualified mortgage. This often involves an inconsistent or nontraditional income structure, a major credit event or high debt. Features associated with non-QM loans include:
Alternative income documentation. Depending on the lender’s requirements, borrowers may demonstrate their ability to repay the loan using tax returns, bank statements, asset qualifiers or 1099s.
No waiting period after bankruptcy. Some lenders offer non-QM loans that cater to borrowers with a history of bankruptcy or foreclosure, allowing them to get a mortgage as soon as one day after the event. Comparatively, qualified mortgages may require a waiting period of one to four years after bankruptcy, and two to seven years after a foreclosure.
Higher debt limits. Qualified mortgages have a maximum debt-to-income ratio (the percentage of your income that goes toward monthly debt payments) of 43%, while some non-QM loans allow for ratios over 50%.
Higher down payment requirements. Non-QM loan borrowers may be required to put a minimum down payment of 15% to 20%. Meanwhile, the typical down payment was 8% for first-time home buyers and 19% for repeat buyers in 2023, according to the National Association of Realtors.
Higher interest rates. Non-QM loans typically have higher interest rates than qualified mortgages. So while it may be easier to meet their requirements than a qualified mortgage, non-QM loans are also a more expensive way to borrow.
The Consumer Financial Protection Bureau defined the standards for qualified mortgages in response to the wave of delinquencies and foreclosures that came with the 2008 economic crisis. At that time, loans were being issued to borrowers who couldn’t afford to pay them. Many of these loans had features the CFPB deemed “toxic,” including interest-only payments. This is not unusual with non-QM loans and can make borrowers more prone to delinquency.
Some borrowers may be attracted to interest-only payments because they are less expensive, but larger payments will eventually come due. And a borrower may not be building equity when making interest-only payments because the loan’s principal balance doesn’t change.
If you’re considering a non-QM loan, you’ll want to review the repayment terms offered carefully. The good news is that riskier factors like balloon payments (which require a substantial lump-sum payment at the end of the term) and negative amortization (where the minimum required payment doesn’t cover the interest, so the loan balance is growing with time instead of shrinking) are much less common today than they were before 2008. Still, you’ll want to enter any loan agreement confident that you fully understand what is expected and can make all required payments.
The requirements associated with qualified mortgages are designed to increase the likelihood that the borrower can stay current on their payments. A non-QM loan may be a good fit for you if you are confident that you can take on the required down payment and monthly amount due and if any of the following apply to you:
You’re a contractor, self-employed, retired or otherwise unable to meet the income documentation requirements for a qualified mortgage.
You’ve recently experienced a major credit event, such as foreclosure or bankruptcy.
You’re a landlord and you want to use the cash flow from your other properties to qualify for a home.
More than 43% of your income goes toward paying your monthly debts.
Where to find non-QM loans
Non-QM loan options tend to be tailored to specific kinds of customers, with unique features based on their needs and challenges. You can find one that fits your needs by researching lender reviews with keywords relevant to your situation.
For example, suppose you’re interested in exploring non-QM loan options because you’ve experienced a major credit setback. In that case, you can look at the lenders on NerdWallet’s roundup of the Best Mortgage Lenders for Low or Bad Credit Score Borrowers and find several that offer non-QM loans.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
500500
Min. down payment
3.5%New American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
3.5%First-time home buyers may qualify for 3% down mortgages at Rocket.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
620620
Min. down payment
0%Veterans United offers VA loans for as little as 0% down.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
620620
Min. down payment
0%On VA loans, NBKC offers down payments as low as 0%.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
4.0
NerdWallet rating
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
500500
Min. down payment
3.5%New American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
620620
Min. down payment
3%NBKC offers conventional loans for as little as 3% down.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
3%Rocket Mortgage offers conventional mortgages with as little as 1% down.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
3%New American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
N/ANew American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
N/ANew American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
500500
Min. down payment
3.5%New American Funding works with down payment assistance programs in 14 states, including California, Texas, Florida and Illinois.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
580580
Min. down payment
3.5%First-time home buyers may qualify for 3% down mortgages at Rocket.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
620620
Min. down payment
0%Veterans United offers VA loans for as little as 0% down.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
NerdWallet's ratings are determined by our editorial team. The scoring formula incorporates coverage options, customer experience, customizability, cost and more.
Min. credit score
620620
Min. down payment
0%On VA loans, NBKC offers down payments as low as 0%.