The Loan Types – a wide spectrum

The terms QM (Qualified Mortgage), non-QM (Non-Qualified Mortgage), hard money loans, and private lending loans are sometimes not as clear as they should be.  In reality, they refer to different types of loans that cater to distinct borrower needs and financial circumstances. Here’s a breakdown of the key differences:

1. Qualified Mortgage (QM) Loans

• Definition: QM loans meet specific guidelines set by the Consumer Financial Protection Bureau (CFPB) under the Dodd-Frank Act. These guidelines aim to ensure borrowers can repay the loan.
• Characteristics:
  • Borrowers’ ability to repay (ATR) must be verified and documented.
  • Limits on loan features such as interest-only payments, negative amortization, or balloon payments.
  • Debt-to-income (DTI) ratio typically capped at 43%.
  • Points and fees are limited (e.g., cannot exceed 3% of the loan amount for loans above a certain size).
• Who It’s For: Borrowers with stable income, good credit, and the ability to fully document their financial situation.
• Examples: Conventional loans, FHA loans, VA loans.

2. Non-Qualified Mortgage (Non-QM) Loans

• Definition: Non-QM loans do not meet the strict criteria of QM loans but still require lenders to assess the borrower’s ability to repay.
• Characteristics:
  • More flexible underwriting guidelines.
  • May include features such as interest-only payments or higher DTI ratios.
  • Often used for borrowers with unique income profiles (e.g., self-employed, gig workers, or real estate investors).
• Who It’s For: Borrowers who don’t meet traditional QM requirements due to unconventional income, recent credit events, or need for tailored loan features. Most so-called hard money lenders or private lenders will play in this spectrum because the borrower is still a high quality counter-party but they are just below the QM classification.  For example, a borrower with a credit of 650 is a decently strong borrower but QM loans would not feel comfortable below 670 due to a prime borrower categorization.
• Examples: Bank statement loans, asset-based loans, and loans for individuals with prior bankruptcies or foreclosures.

3. Hard Money Loans

• Definition: Short-term loans primarily secured by real estate, offered by private investors or companies rather than traditional lenders.
• Characteristics:
  • Focuses on the value of the collateral (property) rather than the borrower’s credit or income.
  • High-interest rates (often 10–15% or more) and fees.
  • Short repayment terms (typically 6–36 months).
  • Fast approval and funding, with less documentation required.
• Who It’s For: Real estate investors, house flippers, or borrowers needing quick cash for projects. The word Hard can allude to something negative but it’s really a reference to the collateral being a hard asset.
• Examples: Bridge loans, rehab loans.

4. Private Lending Loans

• Definition: Loans provided by individual private investors or companies, often with customized terms and a focus on borrower relationships.
• Characteristics:
  • Flexible terms and underwriting based on the lender’s discretion.
  • Interest rates and fees can vary widely.
  • May cater to niche markets or unique borrower needs (e.g., short-term financing, unconventional investments).
  • Collateral often required but not as strictly assessed as with hard money loans.
• Who It’s For: Borrowers who cannot or prefer not to go through traditional financial institutions, including investors or individuals with nontraditional financial needs.
• Examples: Loans for small businesses, personal projects, or real estate investments.