Non-QM Loans: How They Work & Your Opportunity

What Are Non-QM Loans?

Non-QM Loan is an abbreviation for Non-Qualified Mortgage Loans. These loans do not consider all aspects of a borrower’s capacity to repay a loan, such as income ratios, debt load, credit score, and a variety of other criteria, such as the habitability of the house financing the mortgage. Compare this to a qualified mortgage, which is a long-term loan for a home that meets all the consumer protection requirements outlined in the Dodd-Frank Act.

Types of Non-QM Loans

Private Money Rehab Loans

These are sometimes referred to as “Fix and Flip” loans since borrowers utilize them to fix up houses before selling them. The benefit of this form of Non-QM loan is that your client will just make interest payments throughout the loan’s term and will pay the full principle amount when it expires. These loans can even be designed to cover the cost of repairs!

Private Money Bridge Loans

Bridge loans are another sort of short-term loan that can run anywhere from a few months to a year. Aptly called because they bridge the gap between loans and properties. They are ideal for investors who are unable to finance their preferred property through other sorts of loans. Investors with assets but a lack of capital might also benefit from bridge loans. A bridge loan can let allow your client to access the value of their present asset in order to purchase the new one.

Direct Permanent Financing

A direct permanent finance loan helps borrowers pay off a short-term loan with a longer-term mortgage. Assume your client obtained a Rehab loan to remodel a home, but they want to maintain it as a rental rather than sell it. Typically, treatment facilities have a 9-12 month term and require the principal to be repaid. Your client may pay off their short-term loan and refinance the property with 5, 7, 10, and even 30-year periods with a direct permanent financing loan, often known as a rental loan.

Why Borrowers Opt For A NON-QM Loan?

Borrowers prefer non-QM loans for a variety of reasons, including:

• They need a rapid closure, and banks are unable to meet the deadline.
• They have more attractive opportunities than funds to buy them.
• They prefer to focus on identifying new prospects rather than spending too much time obtaining stock or financing from a variety of smaller investors.
• They choose not to disclose all documents to a bank, including tax returns; and
• They have a great investment opportunity but lack the financial strength to obtain a bank loan.
• The house needs renovations to unlock its worth, yet banks cannot look past the house’s current state.

“Non-QM loans are a solid alternative to conventional financing, but they do come at a price,”

Joshua Massieh, 
CEO of Pacwest Funding in San Diego

What’s In It For Brokers & Loan Officers

Following pandemic-induced inflation and the ensuing capital market instability, adding Non-Qm Loans to your list of offerings can substantially broaden your reach and target additional potential consumers who might not otherwise meet the requirements. A non-QM loan can help borrowers who can afford a mortgage but have a unique financial condition that makes acquiring a qualifying mortgage challenging. They may also be useful for investors who wish to qualify using the cash flow from the properties they’re buying.