Having the necessary knowledge about the kinds of mortgages. Available for your financial requirements is quite necessary for this advancing era. If you live in Texas, then you can find the most relevant information regarding mortgages through a Dallas Mortgage Company. In this article, we will be talking about two main types of mortgages: Non-QM and QM mortgages.
What is a mortgage, and how is it different?
A mortgage is simply a loan that uses real estate as collateral for the money borrowed. With most borrowing, the lender requires some form of repayment.
For example, when a consumer purchases an item on credit. They will typically have to make payments to pay off the loan within a certain period. However, with mortgage loans, this is different.
There is no need for such assurances. Instead, the real estate acts as collateral for the loan. In other words, borrowers can use the property as security against defaulting on the mortgage contract. It’s also different from other loans as it does not typically require a strict repayment schedule.
What is a Non-QM mortgage?
A No-QM or Non Qualified mortgage does not require proof of income or assets to qualify for the loan. These types of mortgages are becoming increasingly popular, as borrowers with incomes that are prone to fluctuations. As well as those who are self-employed as independent business owners. Entrepreneurs, contractors, hospitality workers, retirees, actors, artists, and musicians, are opting for this financing option.
There needs to be more than the borrower’s tax returns or pay stubs to determine whether or not the borrower is qualified for a mortgage loan, even if the borrower does have sufficient income.
Non-QM lending guidelines state, in general, that the lender is required to conduct an Ability to Repay (ATR) analysis of the borrower. This can be done in several different ways. Such as by reviewing the cash flow of personal and business bank accounts.
Non-QM loans are often reserved for borrowers with income-qualifying circumstances that are one of a kind. In addition to potential credit concerns such as bankruptcy, foreclosure, late payments. Or other individual credit issues.
What is a QM mortgage?
A QM or Qualified Mortgage, on the other hand, is defined by federal laws that were established in 2014. These laws require lenders to assess a borrower’s ability to repay a loan.
If you apply for a QM mortgage, your lender will likely ask you for proof of employment. Income statements such as pay stubs or tax returns, and credit reports. Depending on the lender, you may also have to provide evidence of assets such as bank balances or stock portfolios.
Once the lender has shown that you are in a position to repay the loan. They are eligible for certain legal safeguards. The more stringent rules for QM loans were implemented to safeguard homeowners and lessen the likelihood of borrowers defaulting on their mortgages.
When applying for a QM loan, the ratio of the borrower’s total debt to their annual income cannot be higher than 43%. And there is absolutely no room for negative amortization. Even when you make payments on your loan, the principal amount can still increase because of negative amortization.
What is the difference between a QM mortgage and a Non-QM-Mortgage?
- Let’s start by looking into QM loans, which have lower interest rates and down payments. This is because the government usually backs QM loans. Furthermore, risky loan characteristics are not a part of QM Loans.
- On the other hand, if we look into the Non-Qualified Mortgage, accepting alternative documents is a thing, especially when you have lost something precious.
- QM bonds are enough to overwhelm, and so is the availability to investors who are not U.S. citizens or permanent residents. Typically, investors are not limited in the number of properties that can be financed.
- One of the most notable differences between a qualified mortgage, and a non-qualified mortgage, is that the latter make use of alternative methods of income verification as opposed to the standard methods of income verification that are utilized by the former (to assist the borrower in obtaining approval for a mortgage loan).
- In addition, the Federal Housing Administration (FHA), or the Veterans Affairs (VA), do not insure, guarantee, or back loans that are non-qualified mortgages.
- Not just that, but if a loan fits the requirements of the QM program, a borrower who defaults on their loan cannot file a lawsuit against the lender for the loan. This shields the lender from any potential legal responsibility.
Why Should Real Estate Investors Choose Non-QM Loans Over Conventional Loans?
When it comes to choosing the right type of loan for your real estate investment. There are a variety of factors that you need to consider.
Traditional loans may be a good option if you want to make minor improvements or repairs on an existing property. Still, they may not be the best choice when funding larger purchases or deals. This is because traditional loans typically have more stringent requirements. And can come with higher rates and fees than non-QM loans.
They offer lower rates and more flexible terms than traditional loans. Making them an appealing option for those who want to fund their next big real estate investment project. In addition, non-QM loans can help investors.
So if you’re looking to finance your next real estate investment purchase or project. Make a sound decision between a QM or non-QM loan. With these flexible options, it can turn out to be the perfect investment in your life.