Non-QM Loans: When Are They a Good Idea?
A non-QM loan can be a good option for borrowers who are financially stable but don’t qualify for a traditional mortgage. Short for “nonqualified mortgage,” a non-QM loan doesn’t have to meet all of the Consumer Financial Protection Bureau’s (CFPB) requirements for a traditional (“qualified”) mortgage.
Because non-QM loans offer more flexible qualification requirements, they’re a potential fit for borrowers who don’t have a credit score, are self-employed or have large assets but limited income. The tradeoff, however, is that non-QM loans are typically more expensive and may include loan features that aren’t allowed with most traditional mortgages.
- Non-QM loans don’t meet the Consumer Financial Protection Bureau’s (CFPB) requirements for qualified mortgages.
- Non-QM loans come with more flexible eligibility requirements and may be a good option for borrowers who are self-employed, have significant assets but limited income or don’t qualify with other traditional mortgage standards.
- Non-QM loans can be more expensive and carry more financial risk than qualified mortgages.
What are non-QM loans?
Non-QM loans are mortgages that don’t meet one or more of the CFPB’s requirements for qualified mortgages. Though these types of loans similarly carry more risk and come with higher costs, they’re not the same as subprime loans, no-doc loans or predatory loans.
Because they aren’t subject to the same rules, non-QM lenders have more flexibility, both in who they approve and in the features of the loans. For borrowers, flexibility cuts both ways: It can make qualifying for a mortgage easier, but it can also come with higher costs and more financial strain.
Even though many of the traditional rules don’t apply to non-QM loans, as with qualified loans, mortgages must prove you can afford the mortgage and satisfy ability-to-pay requirements.
Common features of non-QM loans
Non-QM loans offer flexible qualifications, including:
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Alternative income documentation. Traditional mortgage lenders require pay stubs, tax returns and W-2s to verify your income. Non-QM lenders may accept alternative forms of documentation, including:
- Bank statement loans: The lender uses one or two years of bank statements to calculate your qualifying income.
- Asset depletion loans: The lender considers your assets rather than current income.
- 1099 loans: The lender uses income reported on 1099 forms (typically used by freelance and contract workers) instead of W-2s to verify income.
- Debt Services Coverage Ratio (DSCR) loans: Qualification is based on a property’s expected rental income rather than your personal income or tax returns.
- Recent negative credit events. Non-QM lenders may offer programs that allow you to borrow within days of a recent major credit event, like a bankruptcy or foreclosure. This can mean you won’t have to wait the typical two to seven years required by some qualified mortgage loan programs to take out a loan.
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Higher debt allowances. Qualified mortgages generally limit your debt-to-income (DTI) ratio to 43%, unless you have compensating factors.
Lenders often allow higher DTI ratios for non-QM loans than for qualified loans.Compensating factors are strong points in your financial profile that can help lenders feel comfortable lending to you, even if you don’t meet the typical guidelines. For example, an extremely low DTI ratio, a large amount of cash in savings or a very large down payment.
- More flexible residency requirements. Some non-QM lenders offer “foreign national loans,” which make it possible for borrowers who aren’t U.S. citizens or permanent residents to qualify for a mortgage.
Non-QM loans may also come with unique features like:
→ Interest-only payments. For a set period, you pay only the interest due each month without reducing your loan balance. The downside is you won’t build equity during the interest-only period, and your loan balance won’t decrease.
→ Negative amortization. Some non-QM lenders may allow you to make payments for less than the monthly interest charged. The unpaid interest is then added to your loan balance, which increases your mortgage over time.
→ Balloon payments. You’ll make a larger-than-usual payment at the end of the loan term if your non-QM loan has a balloon payment. But this financing option can be difficult to manage if you haven’t planned for it.
→ Longer loan terms. Some non-QM lenders offer repayment terms longer than 30 years, which can reduce monthly payments, but increase total interest costs. It’s not usually possible to take out a qualified mortgage with a loan term that long, though sometimes a loan modification may bump up a qualified mortgage’s term over 30 years.
→ Higher-priced loans with upfront points and fees. To offset the higher risk lenders take in issuing a non-QM loan, you’ll likely pay a higher mortgage rate, annual percentage rate (APR) and even upfront fees and mortgage points that may exceed limits allowed for qualified loans.
Both qualified and nonqualified mortgages must meet the CFPB’s “ability to repay” rule, which requires that lenders vet your finances and set loan terms that you’re likely to be able to repay. The difference is how they evaluate this information to make a determination.
The best way to avoid getting into a loan that will cause you financial distress down the road is to make sure you understand exactly what you’re committing to in advance. Go through your loan documents with a fine-toothed comb, calculate the highest possible mortgage payment for your budget and create a solid plan for how you’ll repay the loan.
Need help? The U.S. Department of Housing and Urban Development (HUD) offers free housing counseling to anyone in need. Find a HUD-approved housing counselor online or call 800-569-4287.
Overview: Qualified vs. nonqualified mortgages
| Loan feature | Qualified mortgage | Non-QM loan | Typical Non-QM borrower |
|---|---|---|---|
| Debt-to-income (DTI) ratio | Typically capped at 41% to 45% | Not required on some programs | People who exceed qualified mortgage DTI limits or have nontraditional income |
| Income documentation | Tax documents | May allow bank statements instead | Self-employed, gig and contract workers |
| Waiting period after bankruptcy or foreclosure | Two to seven years | As little as one day (depending on lender and program) | Buyers with damaged credit history due to bankruptcy or foreclosure |
| Assets can count as income (“asset depletion”) | Not allowed | May be allowed | High-net worth individuals who aren’t working, such as retirees |
| Down payment | As low as 0% to 3.5%, but 14% is the average | Typically 10% to 25% or more | People who can afford a higher down payment but don’t qualify for a traditional loan |
| Number of financed properties allowed | Up to 10 | No limit | Real estate investors with large portfolios |
Who are non-QM loans good for?
Non-QM loans may be useful for people who are financially sound but have been denied a home loan under traditional mortgage standards. In many cases, a nonqualified mortgage provides a temporary solution until the borrower can meet regular mortgage guidelines and refinance to a qualified loan.
Non-QM lenders offer options tailored to:
- Self-employed borrowers. Self-employed income can be hard to prove, so non-QM lenders offer loans based on your bank statements, rather than tax paperwork. The lender typically looks at the deposits you’ve made over a 12- to 24-month period as a way to determine your qualifying income.
- Borrowers with damaged credit histories. You may be eligible for a non-QM loan one day after completing a bankruptcy or foreclosure. By contrast, you’ll typically need to wait two to seven years after a significant credit event for standard loan programs.
- Borrowers who want an interest-only payment option. Sporadic income-earners may benefit from an interest-only loan that allows for a lower payment option during times of the year when they earn less. One caveat: Your payment could increase after the interest-only period ends, making the loan harder to repay.
- High-net-worth borrowers. If you have a lot of wealth, you may not necessarily have a lot of monthly income. That’s why some non-QM lenders allow you to use an account with a large cash balance as your qualifying income. For example, a lender might consider a $200,000 balance in a savings account as equivalent to $833.33 of extra monthly income for the purposes of qualifying for a mortgage. This is known as an “asset depletion” loan.
- Borrowers investing in multiple rental units. Non-QM loans may be a good choice for investors who own more than 10 financed investment properties, which is the limit for most conventional lenders. Other non-QM lenders offer special loans, known as “debt-service coverage ratio loans,” for real estate investors. If the rent on the new property covers the monthly payment, you don’t need other income to qualify.
- Foreign nationals. A foreign national is a citizen of another country who lives in the U.S. for brief periods of work or vacation. Non-QM loans for foreign nationals may not require proof of U.S. income, credit or a Social Security number.
Pros and cons of a non-QM loan
Pros
- Flexible income documentation. You may qualify for a loan using bank statements, 1099s or other alternative documentation instead of W-2s or pay stubs.
- More relaxed credit requirements. Some lenders accept borrowers with no credit history or those who have experienced a recent bankruptcy or foreclosure.
- Options for foreign nationals. If you’re not a U.S. citizen or permanent resident and don’t have a U.S. credit history, you still may qualify for a loan.
- More flexibility for real estate investors. While qualified loans limit investors to financing 10 properties, some non-QM lenders don’t impose a limit on how many financed properties you can own.
Cons
- Higher down payment requirements. While qualified mortgages may accept down payments as low as 0% to 3.5% (13% on average), non-QM loans typically require a down payment of 10% to 25% or more.
- Higher borrowing costs. Because non-QM loans pose more risk for lenders, they typically come with higher interest rates and fees than qualified mortgages.
- Greater financial risk. Features such as higher interest rates, larger down payment requirements and the ability to qualify based on factors such as potential property income (as with DSCR loans), may increase your risk of mortgage default.
- Fewer lenders. Non-QM loans aren’t as widely available as qualified mortgages, so it may take more effort to compare lenders and find competitive terms.
How do I get a non-QM loan?
The process to get a non-QM loan is very similar to the traditional mortgage loan process, although there are some differences. Here’s a step-by-step guide to secure a non-QM loan:
- Identify the right non-QM program. Pinpoint the reason you don’t qualify for a traditional qualified mortgage and choose the non-QM loan program that best fits your financial situation. For example, self-employed borrowers may benefit from a bank statement loan, while real estate investors may be better suited to a DSCR loan.
- Gather documentation. You’ll still need to submit an application and provide supporting documentation. The main difference is the type of paperwork your lender will need and the requirements you must meet. Instead of traditional W-2s and tax returns, you may need to submit bank statements, 1099s, P&L statements, leases, asset statements or proof of reserves.
- Compare lenders. It’s essential to shop around before choosing a lender, whether you’re searching for a non-QM loan or a traditional mortgage. Fewer lenders offer non-QM loans, but only three to five options will allow you to compare loan offers and save money. This simple step can get you the best rate and save you tens of thousands of dollars, according to a LendingTree study.
- Understand the loan terms. Ask about the annual percentage rate (APR), prepayment penalties, interest-only periods, balloon payments, reserves and refinancing options. Make sure you understand all the costs, risks and limitations before signing your loan documents.
- Have a repayment or exit strategy. Before closing, make sure you have a realistic plan to make your monthly payments in order to avoid accumulating additional debt and damaging your credit.
Ready to research lenders? Our list of the best bad credit mortgage lenders includes several who offer non-QM loans.
Who offers non-QM loans?
Not all lenders offer non-QM products because they require different underwriting standards and often serve niche borrower profiles. As a result, non-QM loans are typically available through lenders that specialize in flexible mortgage products.
You may be able to apply for a non-QM loan with:
- Independent mortgage lenders
- Mortgage brokers who can shop multiple lenders
- Banks that offer portfolio loans
- Credit unions, though availability varies
- Specialty lenders focused on self-employed borrowers, investors or jumbo financing
Non-QM lenders
| Lender | Percent of loans that were non-QM in 2024 | Maximum loan amount | |
|---|---|---|---|
 | 2% | $3.5 million | |
 | 7% | N/A | |
 | 2% | $3.5 million | |
 | 7% | $4 million | |
 | 2% | N/A | |
 | 2% | N/A |
Alternatives to a non-QM loan
If non-QM loans are too expensive or risky for you, you may want to explore one of these alternatives:
| If you … | Alternative to consider |
|---|---|
| Have a recent bankruptcy or foreclosure in your credit history | You can knock up to five years off the usual waiting period for a qualified mortgage if you can prove “extenuating circumstances” played a part in your bankruptcy or foreclosure. Such factors can include unemployment, illness or a death in the family. |
| Have a high DTI ratio | A debt consolidation loan can help you pay down debt more effectively and will lower your DTI ratio. Paired with any increase to your income, you can more quickly get your DTI under the 41% to 45% threshold needed for a qualified mortgage. |
| Want a custom loan repayment term for your mortgage refinance | A refinance lets you restart the clock on a new loan term. Paired with the custom loan terms some mortgage lenders offer, these options ensure you aren’t stuck with the standard 15- or 30-year repayment timelines — you can time your refinance loan’s payoff precisely using any loan term between eight and 29 years. |
| Have no credit | Even with no credit score, you may still get approved for a traditional home loan.
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| Are a self-employed borrower | You may qualify for conventional financing with enough tax history. |
| Have a low credit score | Consider waiting and working to boost your credit score. You can do this by paying bills online and keeping your credit balance low. Also, make sure your credit report doesn’t have any errors. |
| If you have someone willing to co-sign | If you’re too young to have a credit history or have bad credit, a co-signer with good credit can help you get approved for a qualified mortgage. |
Frequently asked questions
Non-QM loans can carry more risk than traditional mortgages if you don’t fully understand the loan terms and can’t realistically afford the payments. Features such as interest-only payments, higher interest rates and larger down payment requirements can increase the cost of borrowing and make repayment more challenging. If you fall behind on payments, you could face growing debt, damage to your credit score and foreclosure.
Credit score requirements vary by lender and loan program. Some lenders may approve borrowers with credit scores as low as 620. However, borrowers with low credit scores may need larger down payments or more reserves and may also be offered less favorable interest rates.
No. Non-QM loans can also serve investors, retirees, asset-rich borrowers, foreign nationals and borrowers who have experienced recent credit events such as bankruptcy or foreclosure.
Yes, if your financial situation improves and you later qualify for a conventional or government-backed mortgage, you may be able to refinance your non-QM loan. However, some non-QM loans may include prepayment penalties. Ask your lender about any potential costs before closing.
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