Qualified mortgages are loans that meet strict guidelines set forth by the Consumer Financial Protection Bureau (CFPB). Lenders assess borrowers’ ability to repay the loan based on their financial information. QMs typically feature standardized terms, limited fees, and are considered more secure for both borrowers and lenders.
Non-qualified mortgages, on the other hand, provide a viable option for borrowers who don’t fit the traditional lending mold. These loans are outside the scope of the CFPB’s ability-to-repay rule and cater to applicants with unconventional financial situations.
Self employment is a common reason a borrower might seek a non-qualified mortgage. While a QM requires W-2s, a self-employed person may not have a W-2. Even tax returns don’t always reflect the income of a self-employed person, since purchasing large equipment for business, as one example, may be deductible. So the tax return would not reflect the actual income at the disposal of the applicant. Non-QMs allow applicants to showcase their earnings through bank statements and business records, providing a more accurate representation of their financial stability.
Borrowers with varying incomes, such as commissioned salespeople or seasonal workers, may benefit from non-QMs. These loans can consider their average income over a period of time rather than relying solely on the most recent pay stubs.