Non-QM does not mean nobody is checking
It means the loan sits outside a safe harbour written for lenders. The Ability to Repay rule still applies to every single one of them.
Non-QM is the worst named product in American lending. It sounds like an absence of rules. It is the name of a category defined entirely by what it is not.
What the letters mean
QM stands for Qualified Mortgage, a definition written by the Consumer Financial Protection Bureau. A loan that meets it gives the lender a presumption of compliance with the Ability to Repay rule. That presumption is the point. It is protection for the lender, not a licence requirement for the borrower.
A Non-QM loan does not meet that definition, so the lender does not get the safe harbour. The Ability to Repay rule in Regulation Z still applies in full. The lender must still make a reasonable, good faith determination that you can repay the loan.
If a product is sold to you on the basis that nobody will check whether you can repay it, that product is not Non-QM. It is something else, and you should walk away from it.
The three documentation routes
- Bank statement programs: income is established from twelve or twenty four months of deposits rather than tax returns. Built for the self employed whose returns show very little after deductions.
- Asset depletion: a schedule of liquid assets is converted into a notional income stream. Built for borrowers with capital and little ordinary income.
- DSCR: an investment property is judged on the rent it produces against the payment it carries, rather than on the borrower personal income.
What it costs
A rate premium over an agency loan for the same borrower. That premium is the entire economics of the product: the loan is held or sold privately rather than to Fannie Mae or Freddie Mac, so somebody is being paid to carry the risk.
Which leads to the only piece of advice that matters here. If two years of tax returns will genuinely qualify you on a conventional loan, take the conventional loan. Non-QM is for when they will not.
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