Andrew Shilling at MarketWatch reported that nearly 1 in 10 mortgages is now non-qualified, or non-QM: loans made outside the standard documentation rules, typically to self-employed borrowers, investors and people with irregular income. The data surprised a lot of readers. Non-QM borrowers are not weaker credits; average scores were 777 versus 781 for conventional loans, and debt-to-income ratios were 38% versus 34%. What differs is the paperwork, and the price.
My rule for clients is simple. If someone qualifies through a conventional path, they should take it. Non-QM makes sense when the documentation is the obstacle, not the borrower's actual capacity to repay. A business owner whose tax returns show a small income because of legitimate deductions, but whose bank statements show strong cash flow, is exactly who these loans were built for. A borrower who cannot make the payment on a conventional loan is not.
The cost is real. Non-QM loans carry higher rates and usually larger down payments, because the lender is taking on more work and more risk. For the right borrower that premium buys a house they could not otherwise finance. For the wrong borrower it is a more expensive version of a loan they should not be taking.
Before going non-QM, exhaust the conventional options: two years of tax returns, a co-borrower, a larger down payment, or waiting a year to build the documented history. The cheapest mortgage is still the standard one.
Read the full article at MarketWatch →
