A Non-QM loan is a mortgage that falls outside the federal Qualified Mortgage rules, usually because income is documented with bank statements, a P&L, 1099s, assets or rental income instead of tax returns. It is not a no-documentation loan: on a home you live in, the lender must still verify that you can repay under the federal ability-to-repay rule. For most borrowers it is a documentation difference, not a subprime product.
What does qualified mortgage mean?
The Qualified Mortgage, or QM, is a category created by federal rule in Regulation Z, 12 CFR 1026.43. The CFPB describes it as a loan with less risky features and protections that make it more likely you will be able to afford it. To be a QM, a loan generally must:
- Avoid risky features: no interest-only period, no negative amortization, no balloon payment (except for certain small lenders) and no term longer than 30 years
- Stay under a limit on the loan's price, measured by its APR
- Stay under a limit on upfront points and fees
- Be based on verified income or assets and debts, along with the borrower's debt-to-income ratio or residual income
FHA, VA and USDA loans are qualified mortgages under their agencies' own QM definitions. Conventional and jumbo loans must meet the requirements to count as QM. The current general QM definition, which moved to a price-based test, took effect March 1, 2021, and became mandatory for applications received on or after October 1, 2022.
When a loan is a QM, the lender is presumed to have followed the ability-to-repay rule. That legal presumption is the main thing QM status gives the lender.
What is a Non-QM loan?
A Non-QM loan is a mortgage that does not meet any QM definition. Most land outside QM for one of these reasons:
- Income is documented with bank statements, a profit and loss statement, 1099s or assets rather than tax returns and W-2s
- The loan has a feature QM does not allow, such as an interest-only period
- The loan's pricing, points and fees or debt-to-income profile fall outside the QM tests
Non-QM does not mean no documentation. It means different documentation. A self-employed borrower might show 12 to 24 months of bank statements instead of two years of tax returns, but the lender still reviews them.
Is a Non-QM loan safe?
No loan is safe or unsafe on its own. What matters is whether it fits you. But a Non-QM loan on a home you live in comes with real federal protections, and they are worth knowing.
The ability-to-repay rule still applies
The federal ability-to-repay rule covers Non-QM consumer mortgages just as it covers QM loans. The lender must make a reasonable, good-faith determination, based on verified information, that you can repay. Regulation Z lists the factors the lender must consider:
- Your current or reasonably expected income or assets, other than the home
- Your employment status, if the lender relies on it
- The monthly payment on the loan, and on any second loan taken at the same time
- Property taxes, insurance and HOA dues
- Your current debts, alimony and child support
- Your debt-to-income ratio or residual income
- Your credit history
The rule lets lenders verify income with third-party records, including financial institution records. That is why bank statement income is a lawful way to qualify, not a loophole.
Limits on prepayment penalties
For consumer mortgages, federal rules allow a prepayment penalty only on certain fixed-rate or step-rate qualified mortgages that are not higher-priced, and even then it is capped: no penalty after three years, no more than 2% of the prepaid balance in the first two years and 1% in the third. A Non-QM loan on your own home generally cannot carry one. If a lender offers a loan with a penalty through a mortgage broker, the lender must also give the broker an option without one, and the broker must present it to you.
Why lenders underwrite carefully
Non-QM loans do not get the legal presumption that QM loans do. A lender that does not document your ability to repay carries more legal risk, which gives it a reason to underwrite with care. That is an incentive, not a guarantee, so read the terms and compare them.
QM, Non-QM and business-purpose loans
Investor DSCR loans are usually sold as Non-QM, but they work differently. Credit to buy, improve or maintain a rental you will not live in is generally treated as business-purpose credit under Regulation Z, so the consumer ability-to-repay rule does not govern it. DSCR loans qualify mainly on the property's rent rather than your personal income, though lenders still check your credit and assets.
| QM | Non-QM | Business-purpose (DSCR) | |
|---|---|---|---|
| Typical borrower | W-2 earners, borrowers whose tax returns show their income | Self-employed, high-asset and other non-traditional borrowers | Investors buying or refinancing rentals |
| How you qualify | Tax returns, W-2s, pay stubs | Bank statements, P&L, 1099s or assets | The property's rent |
| Ability-to-repay rule | Applies, with a legal presumption | Applies, without the presumption | Does not govern business credit |
| Prepayment penalty | Only on certain QMs, capped | Generally not allowed on your own home | Common, terms vary by lender |
What types of Non-QM loans are there?
- Bank statement loans: 12 to 24 months of personal or business statements in place of tax returns
- Profit and loss (P&L) loans: qualify on a P&L statement, with preparation rules that vary by lender
- 1099 income loans: for independent contractors paid on 1099s
- Asset depletion: qualifying income calculated from savings and investments
- DSCR and no-ratio investor loans: qualify on the property, usually as business-purpose credit
- Foreign national loans: for borrowers who are not U.S. residents and do not have U.S. credit or income history
Not sure which Non-QM program fits?We run your file through several Non-QM lenders, since guidelines differ, and show you where it lands.
Talk to a brokerWho are Non-QM loans for?
- Business owners and freelancers whose tax returns show less income than they really earn, after legitimate write-offs
- Real estate investors who want to qualify on rent, or close in an LLC
- High-asset borrowers with substantial savings but limited monthly income
- Borrowers who are not U.S. residents and do not have U.S. credit or tax history
- Borrowers with a recent credit event, where a lender's own guidelines allow it
That mix is one reason Non-QM comes up often in South Florida.
How is a Non-QM loan different from a conventional loan?
A conventional loan follows Fannie Mae or Freddie Mac guidelines and counts as QM when it meets the definition. Because the guidelines are shared, two conventional lenders usually ask for similar things.
Non-QM loans follow each lender's own guidelines, so the details change from one lender to the next:
- Credit minimums, down payment and reserve requirements, which are often higher than conventional
- How many months of statements, and which expense factor applies to business deposits
- Whether a P&L must be prepared by a CPA
- Loan size, property types, interest-only options and waiting periods after a credit event
Pricing depends on your credit, down payment, program and lender. That spread is exactly why comparing Non-QM lenders matters more than comparing conventional ones.
Can you refinance a Non-QM loan into a conventional loan later?
Yes, if you qualify under conventional guidelines at the time. Many borrowers do this once their tax returns show enough income or a credit event is far enough behind them. It is a new loan with full conventional underwriting, so approval is not automatic. On a conventional cash-out refinance, Fannie Mae requires the existing first mortgage to be at least 12 months old. Owner-occupied Non-QM loans generally cannot carry a prepayment penalty, but if yours is a business-purpose DSCR loan, check the note before you plan a refinance.
How we approach it
Non-QM and self-employed files are a core part of what we do. We start by checking whether your tax returns already qualify you for a conventional loan, because that is usually the lower-cost path. If they do not, we compare Non-QM programs across our lender network, since worksheets, documentation rules and pricing differ, and walk you through the terms, including any prepayment penalty, before you choose. All loans are subject to credit approval and underwriting.
Bank Statement loan programQualify on 12 to 24 months of depositsDSCR (Investor Cash Flow)Qualify on the property's rentAsset DepletionQualify on savings and investmentsSources
- CFPB: What is a Qualified Mortgage?
- CFPB: Regulation Z, 12 CFR 1026.43, Minimum standards for transactions secured by a dwelling
- CFPB: Regulation Z, 12 CFR 1026.3, Exempt transactions
- CFPB: Ability-to-Repay and Qualified Mortgage Rule, Small Entity Compliance Guide
- Fannie Mae Selling Guide: B2-1.3-03, Cash-Out Refinance Transactions
Common questions
A Non-QM (non-qualified mortgage) is a home loan that does not meet the federal Qualified Mortgage definition, usually because income is documented with bank statements, a P&L, 1099s, assets or rental income instead of tax returns. Lenders are still required to verify that you can repay. For most borrowers it is a documentation difference, not a subprime product.
Non-QM loans on a home you live in are covered by the federal ability-to-repay rule, so the lender must make a good-faith determination, based on verified information, that you can afford the loan. Federal rules also generally bar prepayment penalties on these loans. Whether a specific loan is right for you depends on its terms and your situation, so compare it against your other options.
Not by definition. What makes a loan Non-QM is how income is documented or a loan feature outside the Qualified Mortgage rules, such as an interest-only period. Many Non-QM borrowers are business owners and investors with strong credit whose income simply does not show up on a W-2.
Pricing depends on the borrower, the program and the lender. Because guidelines vary so much between Non-QM lenders, the same file can price very differently from one lender to the next. If your tax returns qualify you for a conventional loan, that is usually the lower-cost path, so check that first.
Yes, if you later qualify under conventional guidelines, for example once your tax returns show enough income. It is a new loan with full conventional underwriting. Owner-occupied Non-QM loans generally cannot carry a prepayment penalty, but a business-purpose DSCR loan can, so check your note.
General information only, not a commitment to lend or an offer of credit. Loan programs, guidelines, interest rates and terms are subject to change without advance notice and vary by lender. All loans are subject to credit approval and underwriting.
My Liberty Loans is a DBA of Liberty Mortgage Associates Inc., NMLS #275236.