Many homebuyers do not have the standard or consistent forms of income that are typically required by mortgage lenders. Yet, while they may not be able to qualify for conventional loans for various reasons, these buyers may still have enough income or assets to afford homeownership. In these situations, a non-qualified mortgage (non-QM) may be the solution.
In order reduce risk of loss after the mortgage meltdown in 2008, federal regulators tightened borrower requirements on mortgage loans that could be backed and bought by government agencies. Loans that meet all the new criteria are called “qualified mortgages.” Any loan that falls outside of those qualifications is called a “non-qualified mortgage” or non-QM.
A non-QM is a mortgage loan that uses alternate methods to verify income to qualify borrowers. Even though these loans do not meet the standard requirements, they are not necessarily riskier loans. All borrowers are still required to prove their ability to repay the loan. Because there is more work required to process non-QM loans, the interest rates tend to be anywhere from 0.5% to 5% higher, depending on the loan terms.
Who Do Non-QM Loans Help?
Non-QM loans are often a good fit for those who have unique income situations:
Self-employed borrowers
Self-employed individuals often have irregular income that may come from several sources. They can often qualify for a non-QM loan using bank statements rather than tax returns.
Borrowers with considerable assets
Some buyers who can buy a home with cash prefer to take out a non-QM loan to finance their purchase in order to maintain a positive cash flow.
Real estate investors
Those who buy homes expressly to flip them for profit or turn them into rental properties often use non-QM loans. This is because of the quick turnaround or because the qualifying income will come from the projected rent.
Foreign buyers
Borrowers from other countries may not have a U.S. credit score to help them qualify for a traditional loan. As long as these foreign buyers have high income, substantial assets and down payments, they can usually obtain a non-QM loan.
Buyers with blemished credit histories
Non-QM loans can also be helpful for those with sufficient income but credit issues like prior bankruptcy, foreclosures or not enough credit history.
What are the Benefits of Non-QM Loans?
The benefits of Non-QM loans include the following:
A hard money loan is a short-term, asset-based loan, typically secured by real estate, and issued by private lenders or investment groups rather than traditional banks.
Here's a breakdown of what that means:
• Short-term: These loans are designed to be paid back quickly, typically ranging from a few months to a few years (e.g., 6-36 months).
• Asset-based: The loan approval is primarily based on the value of the collateral (usually the property itself), rather than the borrower's credit history and income.
• Higher Risk, Higher Cost: Due to the faster approval process and less stringent underwriting compared to traditional mortgages, hard money loans typically come with higher interest rates and fees.
• Private Lenders: Hard money lenders are usually private individuals or companies specializing in this type of financing, unlike traditional banks or credit unions.
Common Uses: Hard money loans are popular among real estate investors, especially those involved in:
o Fix-and-flip projects: Buying properties, renovating them, and quickly reselling them for a profit.
o Bridge financing: Providing temporary funding until a longer-term loan or sale can be finalized.
o Acquiring distressed properties or those with unique characteristics that might not qualify for traditional loans.
o Land acquisition and development.
o Commercial property deals.
Key differences from traditional mortgages
• Speed: Hard money loans are known for quick approval and funding, often within days or weeks, compared to the weeks or months for traditional mortgages.
• Approval Criteria: Hard money lenders prioritize the property's value and potential, while traditional lenders focus more on the borrower's credit score, income, and debt-to-income ratio.
• Interest Rates: Hard money loans generally have higher interest rates (e.g., 8-15%) compared to traditional mortgages.
• Repayment Terms: Hard money loans have shorter repayment periods, usually six months to a few years, compared to 15-30 years for traditional mortgages.
• Down Payment: Hard money loans often require a larger down payment (typically 20-35%) than traditional mortgages.
• Regulation: Hard money lenders are not subject to the same strict regulations as traditional lenders.
In summary, hard money loans offer a fast and flexible financing solution for certain real estate investment scenarios, but borrowers need to be aware of the higher costs and shorter repayment periods involved.
Foreclosure Bailout Loans are hard money loans used to help a property owner catch up their back payments on the mortgage loan, which will bring their loan current.
When a home owner applies for this loan, they are in one of these positions:
The homeowner is behind on payments but a Notice of Default has not been filed
The homeowner has received a Notice of Default, meaning their lender has notified the trustee to handle the foreclosure process. The homeowner has 90 days to cure the default before the trustee can file a Notice of Trustee Sale
The trustee has filed the Notice of Trustee Sale, giving the homeowner only 21 days to cure the default before the property can be sold at public auction
To receive a quick loan quote to see if the property qualifies, click the Apply Now button below.
I can get you a quote usually within 2-4 hours and the loan can close within 10 business days.
** Note that the property must be located in California.