If you are a Self-Employed Business Owner, 1099 Wage Earner, Foreign National or Real Estate Investor there is a type of non-traditional mortgage loan options that is worth looking into; without necessarily needing to go through a time-consuming process of verifying all of the documentation. Non-Qualified mortgages are quickly becoming the alternative option to traditional loans with a much simpler closing process for borrowers in unique circumstances.
Below we will cover the Ins and Outs of non-QM loans and why it may be the best option for you.
1. What is a non-qualified mortgage?
A Non-Qualified mortgage, or a Non-QM loan, is a mortgage loan that uses alternative documentation income for qualifying borrowers. The qualifications for this type of loan are less stringent than those for conventional loans. Lenders who finance non-QM loans have more flexibility because they do not have to fully adhere to the requirements set forth by the Consumer Financial Protection Bureau (CFPB) and other standards set by the federal government. Lenders can manage their own guidelines to prove a borrower can afford the monthly mortgage payment.
2. Benefits of a non-qualified mortgage
Many people who seek out mortgage loans are denied because they don’t fall within the standard underwriting criteria of Fannie Mae, Freddie Mac or FHA.
Thus, traditional guidelines of the way self-employed take deduction on their Federal Income Tax, Property Types and Down payment Requirements. Here are some ways certain borrowers would benefit from a non-QM loan.
- Alternative Documentation: This feature is especially advantageous for self-employed individuals who tend to have difficulty proving a steady income and are often denied by traditional lenders. During the qualification process of a non-QM loan, you can provide Personal and/or Business bank statements to show proof of income and may even use your assets as income qualification.
- Investor Friendly: Most conventional lenders set will only allow up to 10 mortgaged properties. If you’re an investor looking to build your portfolio, a non-QM could provide the way for that next loan process.Investors who may find it challenging to qualify for traditional mortgage financing always have the best option when choosing this type of financing. Use our Investor Loan Programs to finance multiple investment properties that could vested to a Personal Name, Trust or an LLC.
- Interest-Only Payment Options: For individuals whose income is sporadic, a non-QM loan can provide the option of paying less during the times of the year when you earn less.
- Foreign Nationals: Non-QM loans are increasingly becoming the route foreign nationals take to purchase homes and investment properties, as they may not require proof of U.S. income and credit. Individuals can qualify by creating ITIN Number in USA, Using Country of Residence Credit Documentation and Income Documentation.
- Borrowers with Bad Credit: Having a good credit score is a fundamental piece to qualifying for a conventional mortgage. If you’ve had a recent hiccup in your Credit history, Bankruptcies or Foreclosures, you will benefit from the more lenient qualification process of non-QM loans.
3. Types of non-QM loans
- Bank Statement Loan: These loans are specifically designed for self-employed individuals. In place of tax returns, the lender will request 12 or 24-months of either personal or business bank statements. Using the average of your income, the lender will calculate the loan amount you qualify for.
- No Doc Investment Property Loan: Lenders determine borrower’s ability to repay loan typically with the use of DSCR, also known as income coverage. If the property’s DSCR does not meet the lender’s required minimum coverage, your loan will likely be denied. For real estate investors, this loan uses your credit score and DSCR (Debt Service Coverage Ratio) for the property to determine the loan-to-value ratio, interest rate, and total loan amount. It does not require any personal income documentation and typically requires a larger down payment.
4. Are non-QM loans safe?
A common misconception is that non-QM loans are not legitimate and pose a significant risk. This assumption is false. Though these types of loans do not follow the federal standards for loan qualifications, they still abide by their own set of guidelines to ensure protection for the borrower against a high-risk loan. The process for applying and qualifying for the loan is quite similar to that of a conventional loan, it just allows for alternative documentation options.
The bottom line
Non-QM loans are for borrowers looking for alternative lending options. They are a credible option for many borrowers, particularly real estate investors and self-employed individuals that make home-buying a plausible investment. The market for this type of loan is rising, and people are taking advantage of the flexibility and convenience to further their financial opportunities.