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Qualifying for a mortgage can be challenging, especially if your income is hard to prove or you've had credit issues in your recent past. A non-qualified mortgage changes common loan requirements, making it possible for people with unconventional finances to get the mortgage they need. If you're self-employed, invest in real estate, carry a lot of debt or have had a recent credit issue, a non-qualified mortgage might open the door to home ownership.
But non-qualified mortgages also come with caveats. They can take a bit of legwork to find and may cost more in interest and fees. Still, if you're having trouble getting a mortgage because of income or credit requirements, you may want to look into non-qualified mortgages as an option. Here's what to know before you start.
Qualified vs. Non-Qualified Mortgages
The core difference between qualified and non-qualified mortgages is how closely they follow consumer protections put in place by the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB). These protections regulate interest rates and fees on home loans. They also require lenders to verify that borrowers have the ability to repay their loans to discourage borrowers and lenders from overborrowing.
What Is a Qualified Mortgage?
A qualified mortgage follows specific guidelines that include:
- Consideration and verification of your income and debts
- No negative amortization, interest-only loans or balloon payments
- Limited upfront points, fees and annual percentage rate (APR)
- Loan term of no longer than 30 years
What Is a Non-Qualified Mortgage?
A non-qualified mortgage bypasses one or more of the above guidelines. Here are a few examples of the terms and features you might find in a non-qualified mortgage:
- 40-year term: Spreading payments out over 40 years can lower your monthly payment, but will raise your interest costs over the life of the loan.
- Less required documentation: Use bank statements or even stated income instead of tax returns and pay stubs to verify your income.
- High debt-to-income (DTI) ratio allowed: You may still qualify if your monthly debt payments exceed 43% of your gross income.
- Jumbo loans: Loans that exceed the Fannie Mae and Freddie Mac limits of $647,200 for a single-family home are considered non-qualifying.
- Recent credit event loans: These mortgages are designed to work for people who are locked out of traditional mortgages due to a recent bankruptcy or foreclosure.
Who Needs a Non-Qualified Mortgage?
If you need a bigger loan than you can get from a traditional mortgage, you might consider a non-qualified mortgage. Here are a few scenarios where a non-traditional mortgage might be helpful in securing a loan:
- You're self-employed and your income is difficult to verify. This includes people who want to use side income to help qualify for a loan.
- You need a jumbo loan.
- You invest in real estate or own multiple properties and have multiple loans.
- You need to lower your monthly payment by extending your mortgage to 40 years or getting an interest-only loan that won't require you to pay down your balance.
- You have relatively low income but ample resources—for example, you recently sold your business and retired.
- You recently declared bankruptcy but have recovered and are on track financially.
- You have a high DTI but have a solid strategy for managing your monthly debt.
The good news: You may have options even if you're having a hard time qualifying for the mortgage you want. In a housing market that's seen rising home prices, then rising interest rates, it's not uncommon to want just a little more loan than you anticipated. A non-qualified mortgage may get you a bit more flexibility now. If your situation improves, you may be able to refinance to get better terms later.
Where Can You Get a Non-Qualified Mortgage?
Non-qualified mortgages aren't as common as traditional loans, but they are available through many banks, credit unions and mortgage lenders. Some types of non-qualified mortgages are easier to find than others. Jumbo loans, for example, are fairly common.
You may want to start by talking to your bank or credit union to see if they offer a loan that fits your situation. Or, you may want to consider working with a mortgage broker who can help you pinpoint your challenges and suggest alternatives. Many online lenders have non-qualified loan options as well.
Should You Get a Non-Qualified Mortgage?
Non-qualified mortgages work best for borrowers who have enough income and assets to cover a mortgage, but whose income is difficult to document or whose high debt load or recent credit issues cause them to look riskier to lenders than they actually are. If you can afford the extra dollars in fees or interest, a non-qualified mortgage may help you secure the loan you need.
But before you make the jump, keep these things in mind:
- Make sure you can afford it. A non-qualified mortgage isn't helpful if you wind up getting a mortgage you can't afford. If your income really is unreliable or your debt load too high, you may have difficulty meeting your monthly mortgage payments. A higher interest rate will result in higher costs over the life of the loan. Before you sign a loan agreement, make sure this is a loan you can live with.
- Be a skeptical shopper. Get multiple options and compare. Take a close look at APR, closing costs and terms and conditions.
- Consider the alternatives. Not sure a non-qualified mortgage is a good deal for you? Think about scaling down your home purchase to make your loan more affordable. You may want to wait—to give your credit time to recover, to see if home prices or interest rates moderate or to allow time to save additional money for a down payment (reducing the amount of mortgage you'll need).
The Bottom Line
A non-qualified mortgage can help unconventional buyers get loan approval. But even a non-qualified mortgage is not without requirements: You'll still need to demonstrate an ability to repay your loan and, once you sign your loan docs, you'll need to make timely payments over the long haul. If a non-qualified mortgage gets you into a home on your own terms, it's a benefit. If it looks like it might stretch you beyond your own limits, you may be better off looking for other options.
Whether you opt for a non-qualified or traditional mortgage, your credit is key to securing the best interest rates and terms on a home loan. Check your credit report and credit score for free to see where you stand—and receive helpful tips on improving your credit.