June 14, 2023
Common Misconceptions About Non-QM Lending
Written by Jon Maddux
- Common Misconceptions About Non-QM Lending
In the world of mortgage lending, non-QM (Non-Qualified Mortgage) loans have rapidly gained popularity in recent years. However, misconceptions about this alternative lending option persist, leading to confusion and hesitancy among borrowers and even mortgage brokers. This blog post sheds light on some common misconceptions surrounding non-QM lending and provides useful information to dispel them. By understanding the truth about non-QM loans, brokers and loan officers can make informed decisions and explore viable options that suit their borrowers’ unique financial situations, especially self-employed business owners.
- Misconception: Non-QM loans are only for people with poor credit
One of the most common misconceptions about non-QM loans is that they are solely intended for individuals with poor credit histories. While it is true that non-QM loans cater to borrowers who may not meet traditional lending criteria, they are not exclusively for people with bad credit. Non-QM loans are designed to offer flexibility to individuals who are self-employed, own businesses, have non-traditional income sources, or who simply do not meet the strict documentation requirements of conventional mortgages. Borrowers with good credit scores can benefit from non-QM loans by gaining access to larger loan amounts or avoiding specific limitations imposed by conventional lending guidelines. In fact, FundLoans offers loan amounts up to $6 million.
- Misconception: Non-QM loans have unreasonably high interest rates
Another misconception that often surrounds non-QM lending is the assumption that the interest rates associated with these loans are excessively high. While it is true that non-QM loans may have slightly higher interest rates compared to traditional mortgages, this difference is often justified by the additional flexibility and reduced documentation requirements they offer. Non-QM lenders assess a borrower's overall financial profile, taking into account factors such as credit history, income stability, and assets, to determine an interest rate that aligns with the level of risk involved. As the non-QM lending market continues to evolve and expand, interest rates have become increasingly competitive, making it a more viable option for a wider range of borrowers.
- Misconception: Non-QM loans lack consumer protection
Some individuals believe that non-QM loans do not provide the same level of consumer protection as traditional mortgages. This is a misconception rooted in the fact that non-QM loans do not fall under the guidelines set by the Consumer Financial Protection Bureau's (CFPB) Qualified Mortgage rule. However, it is important to note that non-QM lenders are still subject to various regulatory requirements and must comply with fair lending practices, disclosure obligations, and other legal standards. Furthermore, reputable non-QM lenders prioritize responsible lending and ensure borrowers are aware of the terms and conditions associated with their loans. While the specific consumer protection regulations may differ from those governing qualified mortgages, borrowers can still find transparency and safeguards when working with reputable non-QM lenders, especially FundLoans.
- Misconception: Non-QM loans are too risky
There is a perception that non-QM loans are inherently risky and should be approached with caution. Non-QM loans have a different risk profile compared to traditional home loans but they are not necessarily riskier. Non-QM lenders carefully evaluate a borrower's financial situation, assessing factors beyond credit scores and income to make informed lending decisions. These loans often consider a borrower's overall ability to repay, including their income, assets, debt-to-income ratio, cash-flow, P&L statements, and/or bank statements. Although non-QM loans may be more flexible and accommodating, lenders still exercise due diligence to ensure the borrower's capacity to manage the loan successfully. Furthermore, borrowers can mitigate potential risks by thoroughly understanding the loan terms, consulting with financial professionals, and selecting reputable lenders with a track record of responsible lending.
Dispelling misconceptions surrounding non-QM lending is crucial for brokers seeking alternative mortgage options for their clients. Talk to a FundLoans account executive today to learn more about our programs.