In order to better understand a Non-QM, it is helpful to be familiar with the criteria of a qualified mortgage. A qualified mortgage (QM-loan) is a home loan that meets certain standards set forth by the Consumer Protection Act and the Dodd-Frank Wall Street Reform Act, signed by President Obama following the 2008 housing crisis.

The requirements for a qualified mortgage include:

• Verification of income is required, otherwise known as the “ability-to-repay” rule
• The debt ratio cannot exceed 43%
• Points and fees should not exceed 3% of the loan amount
• The loan cannot have risky features such as negative amortization or interest-only
• The loan term cannot exceed 30 years

These guidelines were adopted by the Consumer Financial Protection Bureau (CFPB) to help prevent poor lending practices that sparked the previous financial crisis.