After the decade’s most horrific housing crash, Americans have been more cautious about the kind of loans to get. Scared of not being able to afford the monthly mortgage payments and risking their house to foreclosure, they take what they believe is the only option — QMs.
Qualified Mortgages, or QMs, prevent borrowers from taking large debts which can get out of control and stop lenders from making loans which borrowers can’t pay back.
However, today’s Qualified Mortgage loans adhere to very rigid standards and qualification requirements. If QM was the only available loan in the market, a lot of families and individuals won’t have a roof over their heads. To a certain degree, QMs are preventing certain people from owning a home even if they have the ability to repay a loan.
Some lenders still make non-QMs because they feel that it still works for specific borrowers. Even the country’s big banks continue to originate this kind of loans because there is a demand for it.
So what should you choose?
Each type of mortgage loan has its own strengths and weaknesses. You have to evaluate for yourself how these affect your individual situation. Moreover, you have to have a good understanding of the nature of the loan to see if its terms work well for you.
QMs have many pros. Here are just a few of them.
Qualified Mortgage loans have a standard approach in determining whether a borrower can afford the loan or not. The goal is to see if the homebuyer can pay the monthly mortgage payments without having any financial hardships.
This also means that it is the lender’s obligation to determine the borrower’s ability to repay the loan. It prevents lenders from making a loan that a borrower cannot afford to pay back. Otherwise, the lender can be sued for making such a loan.
Lenders also follow a standard cap on points and fees. Therefore, they cannot just overcharge their borrowers with it.
Honestly speaking, not everyone can qualify for a QM loan. Because of its strict lending practices, there are only certain people it can serve. A QM loan also takes longer to process than non-QMs. The verification and underwriting processes normally take around two to three months for you to get to closing.Connect with a lender, click here.
Non-Qualified Mortgage loans do not necessarily mean ‘high risk’. This is a common misconception. This loan bridges the gap between QM loans and those who cannot qualify for a QM.
Non-QMs do not have a standard set of documentation needed for qualification. However, this does not mean that it does not require any documentation to support the borrower’s income and asset claims.
Non-QM lenders understand that the lack of documents doesn’t necessarily mean the inability to afford a mortgage. Individuals who are self-employed, earn through commission based projects and the like may be well-able to pay the loan back, they just cannot qualify for QMs.
Because Non-QMs are beyond the scope of QM loans, Non-QM borrowers may not be as protected by the law as QM borrowers. Moreover, points and fees aren’t capped. Some lenders may charge you beyond what is stipulated in the Dodd-Frank Act. This does not mean, however, that all Non-QM lenders do this.
Non-QMs may be more expensive than QMs. Lenders who choose to make Non-QM find ways to compensate for the risks. This loan may have a higher interest rate or a larger down payment. Still, this depends on the lender. This is why shopping for a lender is encouraged.
No one can tell you that one loan type is better than the other. If it worked for them, that doesn’t necessarily mean it should work for you too. The choice is highly personal and is dependent on a borrower’s unique situation. A QM can work for your friends but not for you. It can also be the other way around.
Talk to a lender today and discuss your home loan options.