A non-QM loan can be a dream solution for borrowers ready to buy real estate, for whom a traditional mortgage just isn’t the right fit. Maybe you have the assets and income to invest, but your tax returns don’t reflect the full picture and make it hard to qualify, or maybe you’re self-employed and struggle to secure approval because of it. If you think a non-QM mortgage like a cash flow investor’s loan or a bank statement loan might be the right choice, but you’re concerned about interest rates, we can help.
If you’re considering a non-QM (non-qualified mortgage) loan to buy a home, refinance, or invest in property, you may have noticed that the interest rates and fees tend to be higher than traditional loan options. But before you dismiss a non-QM loan because of the cost, it’s essential to understand why these rates are higher and how the flexibility and benefits these loans offer can often make them well worth the investment.
Why are Interest Rates Higher for a Non-QM Loan?
Non-QM loans are designed for borrowers who don’t fit the traditional mortgage mold. They offer flexibility for borrowers who are self-employed, have irregular income, or earn income through investments. They can also be a solution for borrowers with a higher DTI than typical mortgages allow, or who have had a significant event in their recent credit history.
Because non-QM loans don’t meet the strict underwriting criteria established by the Consumer Financial Protection Bureau (CFPB) for qualified mortgages (QM), they are considered higher-risk loans for lenders. To offset this increased risk, lenders charge higher interest rates and sometimes additional fees.
How Much Higher are Non-QM Interest Rates?
While non-QM interest rates vary depending on several factors, they typically range 1% to 3% higher than rates for conventional loans. For the most accurate answer to this question in your unique scenario, just start here! Generally speaking, here’s what you should know:
- Higher credit scores can result in slightly better rates, so focus on making sure your credit score is a strong as possible when you apply. Watch out for financial moves that can lower your credit score unintentionally.
- A larger down payment may lead to a lower interest rate. Consider if there are any assets you can liquidate or other ways to significantly boost the percentage you can put down.
- Higher loan amounts or unique loan types (such as interest-only payments) may come with adjusted rates. Pay attention to all your options before you settle on one.
What Other Costs are Associated with a Non-QM Loan?
In addition to higher interest rates, non-QM loans may include costs like these:
- Origination fees, which are typically equal to 1%-2% of the loan amount.
- Discount points, which can allow you to pay more upfront to buy down the interest rate.
Is a Non-QM Loan Worth the Higher Rates and Fees?
Although a non-QM loan may come with a higher price tag, the benefits it offers outweigh the cost for many borrowers. For self-employed borrowers, freelancers, and others with non-traditional income, a non-QM loan provides a path to homeownership or real estate investment that may not otherwise be possible. If you know you are ready to own a home, but your fluctuating income or tax returns don’t reflect the whole picture, this can be a dream come true. Non-QM loans also allow larger loan amounts compared to conventional financing. This is especially beneficial for buyers in competitive markets or those purchasing luxury or investment properties.
Simply put, the benefits of owning real estate outpace the higher interest rate in nearly every case. This can be a solution that allows you to keep the ball rolling with investment properties, or qualify for a mortgage when you’re starting a new business. And remember, refinancing down the road is always an option if a traditional mortgage becomes the better fit for you.
We have developed an expertise in helping our clients find the right mortgage for their unique goals and needs. If you want to learn more about how we have helped so many happy clients buy real estate, or you’re ready to apply for a loan, contact us any time.