Quick Answer
A non-QM loan is a mortgage that doesn't meet the federal rules for a Qualified Mortgage. Many serve self-employed borrowers whose tax returns understate their income, using bank statements or a profit and loss statement instead. The lender must still make a good-faith judgment that you can repay the loan.
What makes a loan a Qualified Mortgage?
The CFPB describes a Qualified Mortgage as a loan with less risky features. It can't have an interest-only period, a balance that grows over time, a balloon payment at the end or a term longer than 30 years. There are also limits on the upfront points and fees a lender can charge. When a loan meets these rules, the lender is assumed to have followed the ability-to-repay rule.
What does non-QM mean?
A loan that doesn't meet those rules is often called non-QM. That can be because of a loan feature, like an interest-only period, or because of how the lender documents your income. Many non-QM loans are made for borrowers who work for themselves.
Does a non-QM lender still check that you can repay?
Yes. Every mortgage lender must make a reasonable, good-faith judgment, before the loan closes, that you can repay it. The CFPB says lenders must generally find out, consider and document your income, assets, employment, credit history and monthly expenses. They also can't judge you on a low teaser rate.
Why do self-employed borrowers look at these loans?
Standard loans usually lean on tax returns. Fannie Mae, for example, counts you as self-employed if you own 25 percent or more of a business, and generally asks for a two-year history of your earnings shown with tax returns. Business write-offs that lower your tax bill also lower the income a lender sees on those returns.
How does a bank statement loan work?
The lender reads your personal or business bank statements to work out your income, instead of relying only on tax returns. The federal rule allows records from your bank or other financial institution as proof of income or assets. See our page on bank statement loans.
How does a profit and loss loan work?
The lender bases your income on a profit and loss statement for your business, a summary of what came in and what went out. Each lender decides who must prepare it and what else it needs. See our page on profit and loss loans.
What should you compare before you choose?
Read each Loan Estimate line by line. Check whether the payment can change, how long the term is and whether a large payment comes due at the end. If you can document your income with tax returns, ask the lender whether a standard loan is also an option.
Common Questions
Is non-QM the same as a subprime loan?
No. Non-QM only means the loan falls outside the Qualified Mortgage rules, for example because of how income is shown or because it has a feature like an interest-only period. The lender must still check that you can repay.
Who sets the rules for bank statement and profit and loss loans?
Each lender. There's no single federal standard, so the number of months of statements, who prepares a profit and loss statement and how business expenses are counted vary from lender to lender.
Sources
This guide is general information, not advice about your situation.