Non-Qualified Mortgages (Non-QM)
Posted by Jason Kauffman on September 19, 2022
No matter how many loan products are out there, there will always be borrowers whose situations fall outside the box. Conventional financing follows a pretty hard and fast set of rules that can exclude some very unique situations from being able to qualify for a home loan. The Non-Qualified Mortgage (non-QM) market has emerged out of a need to provide options to these specific situations.
There are different products that non-QM lenders have created to approach the more common situations presented by different borrowers and they can be broken up into some pretty distinct categories. Understand though that the non-QM market is changing all the time and working to find pockets that are underserved.
The non-QM market is building loan product in a space that has higher risk than the Conventional mortgage space. The higher the risk, the higher the guideline requirements for a lender to take on that risk. In the non-QM space, the common denominator is that down payments will be required. Whether it’s a primary residence or an investment property there is going to be a higher level of expectation of skin in the game. Currently 10% down is the minimum we are seeing on primary residence purchases with 20-25% down being more common on investment purchases.
This type of documentation level provides the lender with the highest level underwrite. They are typically looking at tax returns, W2s, and paystubs for a given borrower. Most of the non-QM full documentation programs will have more flexibility on the credit score and derogatory credit events in your past. Conventional and government loan programs have strict guidelines about how long it has to have been since your last foreclosure, bankruptcy, mortgage late payment, etc. The non-QM space presents an opportunity for a borrower that might not qualify for a traditional loan to obtain financing.
Bank Statement Loans
This is hands down the bread and butter of non-QM lenders. Whether you are a self-employed borrower who has been earning more income since your last tax filing or you’re a server at a restaurant that has increased cash tip income that isn’t usable in a traditional conventional underwriting setting, the non-QM Bank Statement program is worth looking into.
Non-QM lenders are taking bank statement deposits, both personal and business, and running calculations that generate average gross income calculations for qualifying purposes.
Debt Service Coverage Ratio (DSCR) Loans
If you are a residential investor that is looking to simplify the approval process to purchase an investment property this program might be right for you. The approval process focuses heavily on the level of income the property will generate and how much mortgage for that property will cost on a monthly basis. The ratio of the income to the mortgage cost is considered and the approval is largely driven by the rents covering the mortgage payment.
It is projected that the Non-QM mortgage space will approach $45 Billion in fundings in the coming years. There are definitely borrowers out there that have an option to purchase where otherwise they couldn’t with traditional financing. Understanding these alternative options is important if you are a borrower that fits one of these more unique situations.