Home mortgages guaranteed by Fannie Mae and Freddie Mac are deemed Qualified Mortgages, or, QM. These mortgages follow standardized parameters for property type, location, area loan limits, income qualifications and debt-to-income ratios. A W2 employee buying their primary residence would be a typical QM transaction.
- But what about a business owner who shows little or no income on their personal tax returns?
- Or an investor wanting a short term rental in a non-warrantable complex?
- Mixed use retail downstairs and residential upstairs for owner occupant or investment?
Non QM Loans solve these types of needs allowing unique properties and/or unique buyers to achieve their real estate acquisition. For those only accustomed to QM financing, here are a few differences you’ll experience in a Non QM Mortgage.
Interest rates are higher. Non QM Mortgages are not federally guaranteed, they are financed privately through investor pools. Expect to see an interest rate 1% to 3% higher than what’s offered at your local bank. You will also not lock your rate until just prior to close. Don’t let this interfere with your goals. If you’re borrowing $400,000, the difference between 5.75% and 7.25% is $334 monthly. Is it something worthy considering? Yes. Should it stop you? No.
Broker fees are paid out of pocket. QM Mortgages include broker compensation in your monthly payment as a portion of the interest rate. Non QM Mortgages list the broker fee as a line item to be paid at closing. Fees average 3%. A $400,000 loan may have a $12,000 fee due to the mortgage broker at closing. These fees pay the team at the lender for originating, processing and compliance.
Prepayment Penalty. Non QM Mortgages include a 3-5 year prepayment penalty. If you are considering using this financing as a short term solution, and intend on paying the loan off within the 3-5 years, budget 5% of the remaining amount to cover the prepayment penalty fee, or, consider a hard money loan.
Hard Money Loans. Access equity from real estate for short term investments and acquisitions. No income, no credit. 12-60 months balloon amortized over 30 years. Here’s an example.
Wealthy investors once had these markets cornered. With Non QM you can level the playing field and build your real estate portfolio
Big Island Mortgages by Doug Mallardi
(808) 333-4341 firstname.lastname@example.org
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