First, a brief walk down memory lane to the financial crisis of 2007-2009. Fueled by risky and lax lending standards, the housing market imploded (along with financial institutions). In the years leading up to the crash, lenders seemed eager to give a mortgage to anyone having a pulse (aka Sub-Prime loans). The terms of many of those loans were detrimental to the borrowers and home values were rapidly over inflating. When the walls fell down, millions of homeowners were faced with loan terms they could not repay and homes where they owed more than they were worth.

Fast forward to 2010, the 2010 Consumer Protection Act and Dodd-Frank Wall Street Reform was enacted. Finally, reasonable lending was mandated and lenders had an obligation to prove that a borrower had the Ability to Repay a mortgage. That meant no risky features to loans (i.e. negative amortization, balloons, and interest-only, to name a few)  Lenders were required to verify income, maximum debt-to-income percentages, loan terms no longer than 30 years, and established maximum points and fees a lender could charge.  Traditional Mortgages are now called Ability to Repay or QM (Qualified Mortgages). These loans are typically sold to Fannie Mae and Freddie Mac. VA and FHA loans fairly fall into the QM category as well.

When the new laws were formed, there was a gap between borrowers who could qualify for a Traditional Mortgage, and those that fell slightly outside of that strict lending box. Most affected borrowers by the QM laws were the self-employed and real estate investors. Tax laws (i.e. allowable write-offs) left this crowd showing much less income on paper than there actually was. The non-QM market grew because of that and originated and potentially sold to other investors because they do not follow QM rules. One type of non-QM loan can be made to real estate investors where lenders only look at the cash-flow of the investment being purchased and not the borrowers overall “other” debt. Another is where the lender looks toward bank statements to show the business income and does not require tax returns. Another could be one that allows a shorter waiting period after a bankruptcy or foreclosure. This article isn’t meant to cover all of the non-QM loans available, just a simple background of the two types of mortgages available in the mainstream. Some may call non-QM lending the new Sub-Prime, but generally the riskiest factors of Sub-Prime are not present with a non-QM loan. Many learned their lesson.

One would not expect the same interest rates between QM and non-QM loans. After all, the non-QM lender is taking a considerable risk in going outside the traditional box.

Conclusion: For those borrowers that have unique financial situation and have exhausted the traditional path, they will be able to find a non-QM lender in this ever growing sector.