What Is a Non-QM Loan?

A non-QM loan is a home loan that does not meet the federal definition of a Qualified Mortgage, usually because of how income is documented or because the loan has a feature the Qualified Mortgage rules do not allow. Non-QM lending is still regulated: the lender must make a reasonable, good-faith determination that you can repay. It simply gives lenders more room to look at your finances the way they really work, which is why self-employed people, business owners and investors with irregular income often end up here.

What "QM" and "non-QM" mean

QM stands for Qualified Mortgage. The Consumer Financial Protection Bureau describes a Qualified Mortgage as a loan with certain lower-risk features that make it more likely you can afford it. Loans that meet the definition give the lender a legal presumption that it followed the ability-to-repay rule.

To be a Qualified Mortgage, a loan generally has to stay away from certain features and follow certain underwriting standards. Under the CFPB's description, a Qualified Mortgage cannot include:

• Interest-only payments a period where payments cover only interest and do not reduce what you owe.
• Negative amortization a structure where the balance can grow even while you make payments.
• Balloon payments an unusually large payment due at the end of the loan, with narrow exceptions for some small lenders.
• An unusually long loan term terms beyond the length the QM rules allow.

A non-QM loan is any residential mortgage that falls outside that definition. The term describes a category, not a single product. Bank statement loans, profit-and-loss loans, asset depletion loans and several other programs all sit under the non-QM umbrella.

Why a loan ends up non-QM

Most borrowers do not choose non-QM because they want an unusual loan feature. They land here because their income or situation does not fit the standard documentation path. Common reasons include:

• Your tax returns understate your cash flow because of business write-offs, so the income a standard lender can count is lower than what you actually earn.
• You are paid on 1099 forms, run a business through several entities, or have income that rises and falls through the seasons.
• You want to qualify using assets rather than a paycheck, which is common for retirees and people between businesses.
• You have an ITIN instead of a Social Security number, or you are a foreign national buying property in the United States.
• The property itself, such as certain condominiums, does not meet the standards agency loans require.
• You want an initial interest-only period or another feature a Qualified Mortgage cannot have.

Rental-property loans based on a property's rent are a separate category, and many people group them with non-QM lending. This site focuses on the owner-occupied and second-home side.

The ability-to-repay rule still applies

Being outside the Qualified Mortgage rules does not mean being outside the law. The CFPB's ability-to-repay rule generally requires lenders to have a reasonable, good-faith belief that you can repay the loan before they make it. Lenders must collect, weigh and record information about your income or assets, employment, credit history and monthly obligations.

Regulation Z, the federal rule that carries the ability-to-repay standard, also says lenders generally verify income and assets with third-party records. Those can include tax returns, records from financial institutions, and other documents prepared or reviewed by an appropriate third party. A borrower simply saying "I can afford it" is not enough on its own.

What changes with non-QM is which third-party records the lender relies on and how it reads them. Instead of qualifying you from the bottom line of a tax return, a non-QM lender might use months of bank statements, a CPA-prepared profit-and-loss statement, or your verified account balances.

Common types of non-QM loans

Programs vary by borrower, property and investor, but most non-QM lending falls into a handful of documentation styles:

• Bank statement loans bank statement programs commonly review 12 or 24 months of personal or business statements. An expense factor is applied to business deposits, or a CPA- or tax-preparer-prepared expense letter is used.
• Profit-and-loss loans P&L programs use a profit-and-loss statement prepared or verified by a CPA, EA or licensed tax preparer.
• 1099 income loans these programs look at the 1099 forms you receive from clients rather than the net figure on your return.
• Asset depletion loans also called asset utilization, these programs divide eligible assets by a number of months the program sets to create a qualifying income figure.
• ITIN and foreign national loans built for borrowers with an ITIN instead of a Social Security number, or for buyers who live outside the United States.
• Full-documentation non-QM standard tax-return documentation, but with a feature or credit history that falls outside agency guidelines.

Who non-QM lending tends to fit

Non-QM lending is not only for people with credit problems, which is a common misunderstanding. A large share of non-QM borrowers have solid credit and real income that simply does not show up cleanly on paper. Self-employed professionals, contractors, real estate agents, gig workers, small business owners and retirees living on savings all show up often.

It can also fit people who went through a credit event and need a path before agency waiting periods are met, though each program sets its own standards. If you can qualify for a conventional or government-backed loan, compare that option too. Non-QM is a tool for when the standard path does not fit, not a default.

What about "no-doc" and "stated income" loans?

You may see ads or search results for "no-doc" or "stated income" mortgages. Today, those searches usually lead to alternative-documentation loans: bank statements, P&L statements, assets, or property cash flow. The income is still documented and verified, just with different records than a W-2 or a tax return.

True stated-income lending, where a borrower wrote down an income figure and the lender did not verify it, largely ended after the 2008 financial crisis when the ability-to-repay rules took effect. Any lender making a residential mortgage is expected to verify that you can repay. Be cautious of anyone who suggests otherwise.

How non-QM loans differ on cost and structure

Non-QM loans often price higher than agency loans because they carry more risk for the investor that buys them. Lenders may also expect a larger down payment, more cash reserves after closing, or both. The exact terms depend on your credit, the documentation type, the property and the loan program, so two borrowers can see very different offers.

Many non-QM programs offer a range of term options, and some offer an initial interest-only period. Those features can lower early payments but can also mean you build equity more slowly, so ask how the payment changes when any interest-only period ends.

How to get started

Start by gathering the documents that show your real income: recent bank statements, business licenses or filings, any CPA letters, and your recent tax returns even if they understate your earnings. A loan officer who works with non-QM programs can tell you which documentation style fits your situation.

Ask for a Loan Estimate from each lender you are considering. The CFPB recommends comparing Loan Estimates side by side, looking closely at origination charges, the APR and the total costs over the life of the loan. Any offer remains subject to credit approval, and programs vary by borrower, property and investor.

Frequently asked questions

Next steps

• Non-QM Loans
• Bank Statement Loans
• Non-QM Loans in Florida
• Non-QM Loans in New York
• Non-QM Loans in New Jersey
• Non-QM Loans in Pennsylvania
• Non-QM Loans in Connecticut
• Non-QM Loans in Virginia

Sources

• CFPB: What is a Qualified Mortgage?
• CFPB: What is the ability-to-repay rule?
• CFPB: Regulation Z 1026.43, Minimum standards for transactions secured by a dwelling
• CFPB: Loan Estimate explainer