Understanding Non-Qualifying Mortgages
Mortgage terminology can be confusing. There are so many different types, requirements, regulations, and so on... For self-employed or nontraditional employees, this can be even murkier, with different needs and financial situations that often don't fit with "standard" mortgage offers. For all of the options out there, the difference between qualifying and non-qualifying mortgages can present some misunderstanding for mortgage shoppers. It's less complicated than you might think! To understand non-qualifying mortgages, you must first understand the basics of a qualifying mortgage. A qualifying mortgage is the most common - or standard - type of mortgage, which requires a hefty amount of financial documentation, proof of the ability to repay, proof of employment, tax returns, current debt documentation, debt-to-income ratio, and so on. These standard qualifying mortgages are best suited for people with traditional, W2 type employment, where such documentation is more likely to be available. Additionally, qualifying mortgages have restrictions on the fees a lender can levee, as well as restrictions on "risky" loan terms, like loan terms exceeding 30 years, negative amortization, balloon payments, and a host of other potentially risky elements that can hurt both the lender and the borrower.
So, the simple definition of a non-qualifying mortgage is that it doesn't have the same requirements as a qualifying mortgage! This means different rules for income documentation and debt, as well as some leeway for terms that fall outside of the standards set for qualifying mortgages. It is extremely important, however, to understand that these loans still have standards in place to protect both the borrower and lender. After the housing crisis, many regulations were put in place to stop lenders from offering subprime mortgages, selling loans to people who can't afford them, and all of the other trouble that led to the crisis. That means that while a non-qualifying loan doesn't conform to the standards of the most typical mortgages, they don't present the risks that many people associate with nontraditional mortgages. Every lender is a bit different, and the variations in non-qualifying mortgages can be vast - but that's precisely their advantage! Offering non-qualifying loans allows a lender to find terms and requirements that work for non-typical borrower. Of course, meeting the "ability to repay" standard still applies here... It is just a different method of achieving the same goal. Ultimately, lenders need to protect themselves from risk, which means offering mortgages that borrowers will actually be able to pay back! Even the most agile lender offering non-qualifying mortgages needs to protect their business, and offer terms agreeable to the borrower. Non-qualifying mostly means nonstandard - that the requirements described above aren't the only way to get a mortgage. For those with atypical income sources (like self-employment), a non-qualifying mortgage is great option. Look for a lender that offers them, and work together to find the terms that best suit both parties!