To understand what a “non-qualified loan” is and if it is assumable, we should have a clear understanding of its brother, the qualified loan.
A qualified loan, in the general sense, is a mortgage loan where the lender is protected by the government when a borrower fails to meet his/her payments and decides to file a lawsuit against the lender.
Qualified mortgage loans (QM), being proven to be stable and having clear requirements, are designed for individuals who show proof of their ability and willingness to pay the loan. These individuals’ applications will undergo a stringent documentation and verification process to prove that they have the ability to repay it.
Non-Qualified loans (Non-QM) are any other loans that do not fit the Qualified Loan definition. If a borrower did not meet the standard requirements to prove that he can make the mortgage payments after necessary documentation, he can take a non-qualified loan.
The Due-on-Sale Clause
When you take a Qualified Loan, most QMs have the “Due-on-Sale Clause”. This clause stipulates that in the event that the property’s ownership is transferred or it is sold, the remaining balance of the loan will be ‘due’ or payable.
In most cases, Qualified Loans are non-assumable. There is one QM loan that is assumable and that is the Veterans Affairs’s mortgage. The person who will assume the loan has to apply at VA to see if he/she is allowed to assume it.
There are Assumable Non-Qualified Loans in the market. There are even more of them than assumable qualified loans. The assumable Non-QM loans do not require any income, credit or employment verification. The one who will assume it will just take over and the lender will do the necessary paperwork to transfer the house title to its new owner.
Consider All Angles
In choosing between getting an assumable non-qualified loan, there are many things to consider. It may require a large down payment to cover what would have been the remaining balance on the mortgage plus the final sales price. If you are planning to stay in that home for a long period of time, putting such a down payment may be worth it. But if you are only going to live in that residence for two to three years, an assumable Non-QM loan won’t benefit you that much. If chosen for the right reasons, this will help you get better interest rates and will allow you to lock in the terms of the previous loan.