What is a "Non-QM" loan?

A "Non-QM" loan refers to a loan that does not meet the federal ability-to-repay standards established under the Dodd-Frank Act. These standards are designed to ensure that borrowers can afford their loan payments based on their financial situations. Non-QM loans are often aimed at borrowers who may not fit the conventional underwriting criteria, such as self-employed individuals or those with fluctuating income, allowing for more flexible underwriting options.

This flexibility can include alternative income verification methods, a wider range of credit scores, or higher debt-to-income ratios. While Non-QM loans can provide opportunities for borrowers who may not qualify for traditional loans, they can also involve higher risks for both lenders and borrowers. These characteristics uniquely define Non-QM loans and differentiate them from Qualified Mortgages (QM), which strictly adhere to the ability-to-repay requirements.

Therefore, recognizing the specific nature of Non-QM loans helps in understanding the broader mortgage lending landscape and the options available for various borrower situations.