As the mortgage industry continues to change, non-qualified mortgage (non-QM) loans are emerging as a growing opportunity. In 2024, non-QM loans accounted for around 5% of total mortgage originations, according to CoreLogic, reflecting a steady rise in demand from borrowers who don’t fit the mold of traditional financing.
Non-QM mortgages are types of loans that cannot be purchased by the government-sponsored enterprises or the federal government. These loans excel at meeting the needs of borrowers whose financial situations don’t align with conforming lending requirements. These programs not only identify the gaps left by traditional loans but also offer practical solutions tailored to unique circumstances.
Looking ahead, S&P Global predicts that in 2025, non-QM loans will make up nearly 30% of non-agency mortgage-backed securities. This growth presents an unparalleled opportunity for mortgage originators to expand their reach. By incorporating non-QM loans into their lending toolkits, originators can serve a broader range of clients and differentiate themselves in a competitive market.
Significant demand
Many borrowers struggle with traditional loan processes for reasons beyond their control. For example, self-employed individuals often don’t have W-2s or a consistent income, leaving them unable to meet standard documentation requirements.
Retirees may lack monthly earnings despite having substantial savings. Real estate investors face difficulty proving personal income while managing multiple properties, and foreign nationals encounter barriers due to their lack of U.S.-based credit histories.
For property flippers and those seeking quick financing, the inflexibility of conforming loans often leads to missed opportunities. These challenges create significant demand for alternatives that recognize a borrower’s broader financial picture.
Innovative approaches
Non-QM loans offer innovative approaches to addressing these challenges. For self-employed borrowers, bank statement programs allow individuals to qualify using 12 to 24 months of deposits, reflecting cash flow rather than tax returns. A freelance photographer, for example, can demonstrate steady income through client payments.
Retirees and wealth-based borrowers can benefit from asset depletion programs, which calculate repayment ability based on total liquid or investment assets. A retiree with a $1.5 million investment portfolio can qualify for a loan even without traditional income.
Debt service coverage ratio (DSCR) loans are often used for real estate investors. These loans focus on rental income generated by the property rather than personal income. An investor purchasing a multi-unit rental property can secure financing as long as the projected rental earnings cover the loan payments.
Non-QM loans accommodate international borrowers by accepting foreign income and credit references. For example, a business owner from Europe investing in a U.S. vacation home can qualify using financial records from their home country.
Quick approvals and flexible terms make non-QM loans ideal for short-term renovation projects. This allows investors to act fast in competitive markets. By addressing all these needs, non-QM loans bridge the gap between borrowers and lenders, creating opportunities that traditional programs often overlook.
Flexible offerings
Beyond addressing specific borrower needs, non-QM loans offer features that make them highly attractive to a wide range of clients. Non-QM programs often offer higher loan amounts than conforming limits, making them ideal for borrowers purchasing high-value properties or luxury homes. A non-QM jumbo loan, for instance, can provide financing up to $3 million or more, opening opportunities for buyers in exclusive real estate markets.
These loans can be customized with features like interest-only payments or extended repayment periods, giving borrowers more control over their finances. For example, an interest-only option might appeal to a borrower looking to lower monthly payments in the short term.
Streamlined verification processes make non-QM loans faster to approve, helping borrowers close deals quickly, especially in competitive markets. This is particularly important for real estate investors and property flippers working within tight deadlines.
From condotels to non-warrantable condos, non-QM loans finance properties that conforming lenders typically avoid. This flexibility is a significant advantage for investors seeking to diversify their portfolios with niche property types.
Changing economy
The demand for non-QM loans has grown alongside shifts in the economy. The rise of the gig economy has created a new class of workers — freelancers, independent contractors and entrepreneurs — who often struggle to meet traditional income documentation requirements.
Similarly, the increasing popularity of real estate investments has driven demand for financing options tailored to investors. Borrowers are also turning to non-QM loans as interest rates fluctuate.
With traditional loan requirements tightening, these flexible programs offer a lifeline for borrowers who might otherwise be left behind. For mortgage originators, incorporating non-QM loans into their offerings will help meet borrower demand and also help their businesses growth.
Non-QM loans are reshaping the mortgage industry by addressing the needs of borrowers who have been underserved by traditional financing. These products offer mortgage originators the chance to expand their client base, grow their business and stand out in a competitive market. By embracing these alternative financing solutions, mortgage originators can meet the changing needs of borrowers while creating lasting success for their businesses.
