Non-QM Loans: Guide to Better Financing in 2024

If you've ever felt like traditional loans don’t work for your unique financial situation, don’t worry—you aren’t alone. It’s 2024, and non-QM (Non-Qualified Mortgage) loans are a game changer and precisely the solution you are looking for!

These loans are for individuals with unique financial situations. I-e: if you are self-employed, have an unstable income, or simply don’t fit the criteria for traditional loans.

This guide will walk you through everything you need to know about Non-QM Loans. Let’s dive in!

What are Non-QM Loans?

These loans are mortgages that don't fit the Consumer Financial Protection Bureau (CFPB) criteria for qualified mortgages. This gives the non-QM lenders the freedom that traditional lenders don't get. This freedom allows lenders to be lenient in who they approve loans for and in the features of that loan.

There are no debt-to-income (DTI) ratios or strict guidelines for these loans, as is the case for qualified loans. It makes them more accessible for borrowers at different stages of life and finances. Of course, while they are risky for lenders, they also come with higher interest rates and flexibility to compensate for that risk.

Key Features

This kind of mortgage gives unique features to a variety of borrowers. Let’s see what these features are:

• Interest-only payments: The lenders who offer interest-only payments don't ask you to pay down any part of your loan balance for the first few years. You only pay the interest that rises monthly. The downside is that you will have little equity and a substantial outstanding loan amount after several years of paying regularly.
• Longer terms: A non-QM lender might offer a loan term longer than 30 years, but traditional loan terms never allow that.
• Balloon payments: If your non-QM lender has a balloon payment option, you can make small periodic payments and large one-time payments at the end of the loan period. This is only a good option for some since the large sum can be overwhelming to pay simultaneously.
• Negative amortization: If you have a non-qualified mortgage, the lender may allow you to make payments less than the interest they charge you monthly. Consequently, your loan balance increases with time, even when making payments (known as "negative amortization").

Types of Non-QM Loans

There are many types of non-qualified mortgages, each catering to a different kind of borrower. These are some of the common types in 2024.

Bank Statement Loans

Bank statement loans are specifically for borrowers with inconsistent incomes, usually self-employed or small business owners. However, even with their financial situation, they can tell lenders they can repay the loans. So, instead of tax returns and other documents, the lender gets the reassurance through the borrower's bank statements—typically for 12-14 months.

Bank Statement Loans are riskier than the average traditional loans, so many Banks and Lenders are reluctant to offer them. The risk factor is that these loans are non-QM loans and not backed by Fannie Mae and Freddie Mac,government-sponsored enterprises (GSEs), so there's no protection against losses for lenders and borrowers.

Requirements for Bank Statement Loans

You can get a bank statement loan with a score of as low as 620, but the rates and terms would be subpar compared to if your score was 700 or above. Moreover, if you are on a lower score, you might also have to make a larger down payment. If you are thinking of applying for this loan, then there is an eligibility for non-QM loans, which is:

•       Have a credit score of at least 620.
•       Be able to provide bank statements for two years.
•       Have adequate cash reserves.
•       Have a debt-to-income ratio of 45% or lower.
•       Make a down payment of at least 10%.
•       A profit and loss statement for your business.
•       Provide other documents: Business licenses, organization documents, etc.

DSCR Loans

The debt-service coverage ratio (DSCR) calculates a firm's available cash flow and shows lenders and investors whether it has enough income to pay its current debt obligation. Thus, a company's cash flow matters more than the borrower's income.

DSCR measures the ratio by dividing net operating income by debt seduce, including the interest and principal amount. Lenders assess a borrower’s DSCR to determine whether they can pay the debt at the company’s current income level. It shows how healthy a company’s cash flow is and whether it can qualify for a loan.

Below are some of the debt-service coverage ratios and what they mean:

• A DSCR of less than 1.00 shows negative cash flow, indicating that the company cannot pay its debt without a loan.
• A DSCR of 1.00 shows that a company has enough income to pay off its debt service cost.
• Although no industry standard exists, a DSCR of 2.00 can be a good sign because it shows the company can pay twice its debt. Lenders will usually look for a minimum DSCR of 1.2 to 1.25.

Asset-Based Loans

Asset-based lending involves loans under an agreement backed by collateral. You can take out a line of credit or an asset-based loan by using your inventory, accounts receivable, equipment, or other property as swiftly as possible. 

Asset-based loans don’t target consumers. The majority of borrowers are small businesses with valuable physical assets. However, even big businesses occasionally take out asset-based loans to meet urgent demands. Businesses are the prime audience, so it's known as asset-based financing.

Many businesses require credit lines or loans to satisfy regular cash flow requirements. For instance, a company can take up a line of credit to ensure that it can pay its costs even if it experiences delays in payments it expects to receive. Asset-based lenders can grant loans using a business's tangible assets as collateral if it can't show sufficient cash flow or assets to cover the loan amount.

Jumbo Loans

A Jumbo Mortgage, or jumbo loans, are reserved for larger expensive properties. These exceed the standards set by the federal government and Finance Agency (FHFA)  for the loan size. So, you'll need a jumbo mortgage to buy a large mansion—or a house in a considerably expensive neighborhood.

Jumbo mortgage lenders offer up to 3 to 5 million dollars in loans. If you want, you can find jumbo loans with even higher thresholds. These loans are typically used for investment purposes or vacation houses.

However, the maximum number of jumbo loans you can get differs depending on the area you want to buy in or your mortgage lender. Since the market for these loans is small, you need to find someone specializing in them.

Jumbo Loans Requirements

Generally, jumbo lenders have more rigid underwriting requirements than conforming mortgage lenders. Jumbo mortgages carry greater risk for the lender because they aren't backed by Fannie or Freddie. In summary, you must ensure that your credit record is great or very strong to qualify for one of these large loans.

To be approved for a jumbo loan, consumers typically need to meet three requirements:

• Income.
• Credit Score.
• Cash Reserves (to make down-payment).

Interest-Only Loans

An interest-only mortgage is only cleaned with interest payments in the first few years, much like its name suggests. So you have up to 10 years to make these smaller interest payments—after this period, you can either pay the remaining balance, refinance, or begin regular monthly payments.

Since interest-only mortgages are non-qualified, the Consumer Financial Protection Bureau (CFPB) considers them risky and dangerous. These risks include the interest-only period and the balloon payment at the end of it. These loans are not qualified for government-backed programs such as USDA, VA, or FHA-backed loans.

Requirements for Interest-only mortgage.

Is applying for an interest-only mortgage easier because of a smaller initial payment? Well, it's the opposite. Many lenders have more strict requirements than the traditional fixed-rate loans. To qualify for an interest-only mortgage loan, you'll need the following things:

• A debt-to-income (DTI) of below 36%.
• A credit score above 700.
• Enough assistance and income to show you can repay the loan debt.
• A down payment of a minimum of 15% (It depends on the lender)

Foreign National Loans

Buying a house seems impossible if you are a foreign national in the United States. However, it's not because of foreign national mortgages. 

Foreign national mortgages are non-qualified mortgages meant for those who aren't citizens of the United States but want to buy real estate, either as an investment or to have a place to live. These loans prevent any hurdles that come in between them.

Non-residents are generally allowed to get a foreign national mortgage without needing a Social Security number, visa, or green card. So, instead of providing a FICO to prove creditworthiness, they can submit a credit report from their home country.

Fix and Flip Loans

A fix-and-flip loan is a short-term loan meant to help real estate investors buy and renovate properties. It has a higher interest rate, usually between 8% and 12%, than a conventional loan. 

Fix-and-flip loans give investors the money to buy an undervalued and distressed property, renovate it, and sell it for a profit. These loans quickly turn a profit, but they come with risks; however, they also present a good opportunity for real estate investors seeking to turn a profit soon.

How Non-QM Loans Differ from Qualified Mortgages

Understanding Qualified Mortgages

Qualified mortgages are loans that satisfy and are per the provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act was a significant financial reform passed in 2010 to protect mortgage lenders and secondary market trading.

After the mortgage crisis in 2007, the government introduced clauses in this act to shield the financial system and borrowers from the risky lending practices that led to the situation.

How do Qualified Mortgages work?

To qualify for a Qualified mortgage, you must fulfill specific requirements as a borrower. These standards are based on the borrower's capacity to repay the mortgage (as per their income, debts, and assistance). Following are some of the requirements for a qualified mortgage:

• The borrower must not have taken monthly debt payments that exceed 43% of pre-tax income
• The lender must have charged at most 3% in origination fees or points.
• The loans were issued with terms other than overpriced and risky, such as balloon payment, interest-only mortgage, or negative amortization.

Non-QM vs QM Loans

There are some prominent differences between a Non-QM and a Qualified Mortgage Loan. Let's see what they are:

• Income Verification: A non-QM lender calculates income using a bank statement, while traditional mortgage lenders require more documents, such as tax returns, W-2s, pay stubs, etc.
• Debt Allowances: A Non-QM lender won’t care if you have DTI over 43%, but the same wouldn’t qualify you for a traditional mortgage without some compensating factors.
• Time: A non-QM lender allows you to get a loan within days of a significant recent credit event (bankruptcy or foreclosed). However, the same is different for traditional mortgages, where you must wait two to seven years.
• Loan flexibility: Borrowers with alternative income or imperfect credit can qualify for non-qualified loans, such as interest-only payments or balloon payments, prohibited under qualified loans.

Who Should Consider a Non-QM Loan?

Ideal Borrower Profiles

Typically, non-qualified loans are for people who have the finances to repay the loan but don't necessarily fit into the standards for qualified loans. It is a temporary solution until the borrower fits the traditional loan standards. There are certain niches that non-qualified loans are catered to:

• High net-worth borrowers: If you have generational wealth or just savings instead of a proper monthly income, it's unlikely that you'll qualify for a qualified loan option. In this case, the non-qualified lenders would look at your account with the large cash balance as your qualifying income--they would break down your total savings or cash into monthly income to qualify for a mortgage. This phenomenon is called the 'asset depletion' loan.
• Self-Employed Borrowers: If you are self-employed, you know it takes a lot of work to prove your income to lenders. In this scenario, non-qualified mortgage lenders would offer you a loan based on your bank statement for the last 12-14 months, considering that to be your qualifying income rather than your tax returns.
• Real-estate investors: If you already own ten financed properties, you can't qualify for another traditional loan because that's the standard limit for most lenders. However, non-QM lenders would offer you particular loans, like DSCR loans, if you are an investor.
• Borrowers with credit challenges: If you've filed for bankruptcy or foreclosure, you'd need to wait for 2-7 years before you can apply for a conventional loan. On the other hand, with non-qualified loans, you can apply the very next day after your bankruptcy.
• Foreign nationals: If you've been living in the United States as a non-citizen, whether for work or vacation, you can qualify for a non-qualified mortgage without showing your US income, social security number, or credit.

Common Reasons for Seeking Non-QM Loans

Most borrowers often seek non-qualified mortgage loans because they offer better solutions where qualified loans fail. Some of the reasons people go towards these kinds of loans are:

• Investors seeking to buy more than one property or finance rental income properties benefit from it.
• People who have experienced credit issues and don't have a good credit history because they can still qualify for a non-qualified mortgage.
• The terms of these loans are flexible compared to conventional loans, such as interest-only payments or balloon payments.
• If you want to fund unconventional or unique property, qualified loan lenders might be reluctant to lend you money.
• People who don't want to show their full tax returns, primarily if they use legal strategies to reduce their taxable income.

Pros and Cons of Non-Qualified Loans

Advantages for Borrowers

Non-qualified mortgages offer many advantages for borrowers. Below are some of the benefits of the non-QM loan.

• The process is much faster than that of conventional loans since there are fewer rules and guidelines. It’s suitable for the borrower because they can quickly close the loan and occupy the property.
• The criteria are less rigid than those for conventional loans. No strict income, credit, or debt-to-income ratio rules make these loans the perfect option for homebuyers who are qualified mortgage lenders isolated.
• The flexibility and customizability of the loan options are among the best advantages of an unconventional loan.
• It's an excellent alternative to conventional loans for people who need more finances. So, it makes it easier to buy property even if you don't meet the criteria for traditional loans.

Potential Drawbacks

While unconventional loans have unique advantages, they also have certain drawbacks.

• Lenders take risks by providing loans to people with non-traditional financial backgrounds, charging a higher interest rate to compensate for that risk. The higher interest rate usually results in higher monthly payments.
• Lenders require a larger down payment, sometimes 20-30% of the property's value. This requirement can become a hurdle for some borrowers who don't have significant savings, especially for property finances through jumbo loans.
• The lenders for non-qualified mortgage loans are less than conventional lenders. This limited availability can create an issue for borrowers because they can only bargain a little.
• There is a higher risk of default because some unconventional loans, like interest-only payments, come with higher payments in the future. So when the interest period ends and the borrower’s financial situation still hasn't improved, it would lead to default or a need to refinance under less favorable terms.
• There is less consumer protection than with conventional loans because fewer regulatory projections are in place to protect borrowers from taking out loans they can't afford to pay back.

Navigating the Non-QM Loan Process

Application Steps

If you wish to apply for a non-qualified loan, the process might be easier than conventional mortgages due to the lack of strict standards, but you may have to submit even more documents. So, let's break down the steps for you.

Choose and Consult a Lender

For these kinds of loans, it's crucial if you work with a lender who specializes in Non-qualified mortgage loans. Because these loans don't follow the Consumer Financial Protection Bureau Guidelines, the Banks tend not to offer them due to the risk.

So, make sure you choose a lender who gives you advice based on your financial situation and doesn't scam you into agreeing to unreasonable terms, like balloon payments. Shop around and get quotes from a few lenders before selecting one.

Prequalification

After you select a lender, they will analyze you based on your income, credit score, assets, and any other information you provide. This prequalification process gives you an estimate of how much you can borrow from the lender.

Gather Documents

Make sure you have all the required documents for the application on hand. It doesn't matter if you're applying online or in person. It's best to check the necessary documents with your lender (or check below).

Submit Application

After the lender has qualified you and you have all the documents, start with the official application. You must submit basic information (name, contact information, driver's license number, etc.) and the documents for proof of your income, assets, employment, other debts, etc.

Get pre-approved

Once you've submitted your loan application, the lender will process it and see if you fit their criteria. If you do, the lender will provide you with a pre-approval letter telling you the amount you are eligible for, the interest rate, and other loan terms.

Find a Property

If you already have a property in mind, if you don't then select the property or a real estate agent to do it for you. A property that meets your budget and the lender's loan amount.

Appraisal and Approval

Once you've found the property and it has been appraised and approved by the lender, the lender will complete a final underwriting review and issue you a loan commitment letter. Once you’ve completed all the steps and received the letter, you can close the loan and take ownership of your new house.

Tips for Securing Approval

Getting approved for a non-conventional loan might be slightly different than getting approved for a conventional loan, so below are some tips you can use to secure that loan.

• While non-QM lenders don't rely entirely on perfect credit scores, maintaining a decent one might improve your chances for approval and get you better interest rates.
• Make sure you've prepared yourself to pay a larger down payment. Non-qualified mortgages often require up to 30% downpayment, so ensure you have sufficient savings.
• While non-qualified mortgages allow for alternative forms of documentation, it's always a good move to have comprehensive and transparent financial records, like bank statements, asset information, tax returns, etc., as this can impact the approval process.

Documents Needed for Non-QM Loans

There is a difference in required documents for non-qualified and traditional qualified mortgage loans. Below is a breakdown of all the documents you need when applying for a non-qualified mortgage loan:

• Bank Statements: Non-QM lenders usually request bank statements from the last 12 to 24 months. These statements verify cash flow, deposits, and general financial stability, showing that non-qualified loans rely heavily on documentation.
• Tax Returns: Although non-qm loans are more flexible, some loans under them still require tax returns. Since they provide a detailed financial history of the borrower, they mainly help the self-employed, business owners, and those with inconsistent income.
• Rental Income Documentation: Lenders require this documentation, especially when the borrower is applying for DSCR (Debt Service Coverage Ratio) Loans. This documentation proves the income generated from rentals and investment properties, helping determine if the borrower can handle multiple properties.
• Asset Documentation: Non-qm lenders may also require borrowers to submit proof of their liquid assets, including savings and checking accounts, money market accounts, and investment accounts. This document is essential to determining the borrower's financial stability and ability to pay the mortgage payments.
• Credit Report: While the credit report is less critical for non-qualified loans than for qualified loans, the lender might still want it to assess the borrower's creditworthiness.
• Visa and ITIN: Non-qualified mortgage lenders require foreign nationals to provide their visa, visa waiver, and three open and active trade lines with at least two years of history to apply for a foreign national loan.
• Property Appraisal: Like any other mortgage, non-qualified lenders also require a property appraisal to ensure the loan amount aligns with the market value of the property you intend to buy.

Regional Considerations for Non-QM Loans

Variations in Availability and Requirements by State

Non-QM loans, not restricted by conventional qualifying mortgage (QM) requirements, offer borrowers various options that differ by state. Some examples are:

• California: Due to its high property prices, it provides to borrowers who exceed the standard requirement for a qualified loan.
• Texas: Well-known for bank statement loans, particularly for independent contractors who can provide bank statements instead of tax returns as evidence of income.
• Florida: Borrowers can benefit more from DSCR (Debt Service Coverage Ratio) loans because they qualify based on rental income rather than conventional income.

Furthermore, statutory requirements regarding non-qualified mortgages differ from state to state. Such as:

• New York: Non-qualified mortgage lenders in New York might ask for more documentation due to their strict consumer protection regulations.
• Ohio/Indiana: These states have fewer loan options because of lower housing demands and more restrictive regulations.

Local Lenders and Their Offerings

Working with a local lender for your loan is better because they better understand both the borrower's demands and the local non-qualified market. Below are some of the advantages of working with a local lender:

• Regional banks and credit unions often offer tailored loan options to people depending on their state and the market. For instance, in a competitive market like New York, lenders might provide interest-only loans for luxury properties.
• Local lenders can quickly process and approve loans and offer more personalized services than a large bank.

Calculation of Non-QM Mortgage Payments

The calculations for non-qualified loans are similar to those for qualified loans. There are four essential components of monthly mortgage payments. You can remember these components by the acronym PITI: Principal, Interest, Taxes, and Insurance.

Components of Non-QM Mortgage Payments

Let's talk about each component in detail below.

• Principal: This portion of the loan decreases the overall amount to the lender. As time passes and the borrower makes payments on the mortgage, the balance among the principal decreases, enhancing the level of equity you have in the house.
• Interest: This is known as borrowing costs. Once you get a loan, the lender specifies how much interest they will charge on the amount lent, which is critical since it determines how much interest you will pay every month.
• Taxes: The local authority imposes taxes on the properties, compromising themself in the mortgage payments. Usually, the lender collects these taxes from the borrower and pays them to the government on their behalf.
• Insurance: Due to the risky nature of non-qualified loans, the mortgage payment includes homeowner's insurance. It protects against losses to the property and the lender's investment. Like taxes, these payments are held onto and paid when the premiums are due.

Frequently Asked Questions About Non-QM Loans

How Can I Qualify for a Non-Qualified Loan?

It's much easier to qualify for a non-qualified loan than a qualified one. You must provide alternative documentation, such as bank statements or assets, rather than the traditional qualified mortgage requirement. Your eligibility for a loan is judged based on your property's cash flow and financial health.

If your lender requires it, you may have to show rental income, a strong credit score, or even be willing to pay a sizeable down payment. However, the qualification process is generally more flexible than conventional loans.

What Fees are Associated with these Loans?

You might need to pay higher fees for non-qualified loans because of their risky and flexible nature. Some of the fees you might have to pay are:

• Fees for processing the loan.
• To assess the property (appraisal fee).
• Closing costs, which might include title search and insurance.
• Lenders may charge for personalized loan structures.

Can You Refinance a Non-Qualified Mortgage Loan?

Yes, it is possible to refinance a non-qm loan, but it also depends on the lender, the terms of the loan, and the borrower's situation.

Conclusion: Is a Non-QM Loan Right for You?

Navigating the world of loans can feel like a maze, especially if you want something personalized for your financial situation. Enter Non-QM (Bob-Qualified Mortgages) Loans—they are flexible and cater to people who don't fit into the mood of conventional loans. Ready to see if a Non-qualified loan is the right fit for you? Contact us today and find the perfect match!