Non-QM Mortgages: How to Qualify for Specialty Financing
This article covers non-QM mortgages and how to qualify for them.
Non-QM lending programs are helping to fuel the already booming housing market. Borrowers who cannot qualify for a traditional qualifying mortgage (QM) may now qualify for non-QM lending programs.
Non-QM loans can finance primary residences, second homes, and investment properties. Non-QM and specialty mortgages are not hard money loans. Interest rates for non-QM mortgages are higher than those of QM loans. Especially for those with less than 20% down because mortgage insurance is not available for these products. That makes them much riskier for lenders.
Non-QM Loans Aren’t Standardized
There are no set non-QM lending mortgage guidelines. Because non-QM mortgages are non-conforming loans, they don’t have to meet guidelines established by Fannie Mae, Freddie Mac, or the FHA, VA, or USDA. Each non-QM wholesale lender creates its own lending guidelines. Lenders can also make exceptions case-by-case. If a deal makes sense, lenders tend to be open-minded.
What Are Non-QM Mortgages?
What is a non-QM loan?
A non-QM mortgage is a “non-qualified” mortgage. So-called qualified mortgages meet rather conservative standards for qualifying and pricing and are the safest products for lenders and borrowers. There are specific rules defining QMs, but most are government-backed loans or conforming (Fannie Mae or Freddie Mac) home loans.
Lenders are protected from certain lawsuits or having to buy loans back if they fail, but only for QM loans. Non-QM loans are perfectly legal and can be better for many borrowers. However, lenders have less protection from the government and no protection from mortgage insurers, so they will charge more for these products.
According to CoreLogic, the most common types of non-QM loans have one or more of these features:
- Interest-only payments for an introductory period
- Alternative methods of income documentation
- Debt-to-income (DTI) ratios over 43%
CoreLogic also noted that non-QM loans in 2018 performed as well as or better than QM loans, largely because their borrowers tended to have better credit scores or larger down payments than traditional QM borrowers.
Non-QM Mortgages for Self-Employed Borrowers
Self-employed mortgage applicants face a challenge when proving their income. That’s because most programs use the applicant’s taxable income for qualifying. And self-employed people generally have a lot of write-offs that reduce that income. So the taxes don’t always reflect the amount of money that is available to pay a mortgage.
Bank statements solve that problem. Applicants provide 12 or 24 months of their bank accounts to prove how much money they make. Lenders examine business account statements and assume that 50% to 60% of those deposits are income and the rest goes toward business expenses. Alternatively, they may look at applicants’ personal account statements and count 100% of transfers from the business account as income.
The 12-month bank statement mortgage program requires a 20% down payment. Borrowers who want to put less than 20% down can choose the 24-month bank statement mortgage program.
Gustan Cho Associates offers rate and term non-QM refinance sat 90% loan-to-value with a 720 credit score. Homeowners can do an 80% loan-to-value cash-out refinance with a 740 credit score with non-QM loans. There is no maximum loan limit or private mortgage insurance with non-QM loans.
Investor Series Non-QM Mortgages: Debt Service Coverage
Real estate investors have special needs. Most QM products limit the number of financed properties a borrower can have, and government-backed loans only allow owner-occupant borrowers. Non-QM investor loans offer some useful features:
- No limit on the number of financed properties
- Investor products do not require landlord/rental history
- Vested as LLC or corporation is acceptable.
- Rate-and-term refinance up to 80% LTV with 720 credit scores
- Cash-out refinance up to 75% LTV with 720 credit score
Lenders use the property income to qualify. Rental income must be at least 115% of the principal, interest taxes, insurance and homeowners association dues (PITIA).
Our non-QM wholesale investor will only finance a total of $5 million per borrower. Any aggregate loan size higher than $5 million will be evaluated case-by-case.
Non-QM Mortgages for Bad Credit
Traditional QM mortgages require waiting periods after serious derogatory events like bankruptcy or foreclosure, even if the event was not the borrower’s fault and even if the borrower has otherwise good credit.
Non-QM mortgages don’t impose these waiting periods. In fact, you can be one day out of foreclosure and still qualify for a non-QM mortgage. There are also non-QM home loans for people with recent late payments or bad credit scores. And some non-QM loans allow co-signers for applicants with poor credit scores.
The more recent the derogatory credit event, or the lower the credit score, the higher the interest rate. Down payments may also need to be larger.
Non-QM Mortgages With One Year Tax Returns
QM lenders almost always require at least two years of tax returns for self-employed applicants.
This can be difficult for those who started their business a couple of years ago. Because they could be making very good money by Year Two but the lender will average that income over two years, including Year One when there were startup costs and no money yet.
And the income is treated conservatively — if it’s increasing, the lender takes the average, which is lower. If it’s decreasing, the lender takes the lower year. Or even less if it believes that the business or industry is risky.
But there are non-QM mortgages that require only the most recent year of tax returns for self-employed borrowers. That can be a real advantage for those with newer businesses or businesses with fluctuating income.
Doctor’s Specialty Mortgage Programs
Doctor mortgages are designed to solve specific problems that new doctors have when applying for mortgages:
- High student loan debt
- Little or no savings
- Minimal work history
One thing doctors in the US enjoy, however, is very high earning potential. Non-QM mortgages for doctors take this into account.
There are loan programs available for doctors with a zero dollar down payment, even in the jumbo mortgage market. What is a doctor’s mortgage program? It’s a unique mortgage with flexible guidelines for licensed graduates of these programs:
- MD – Doctor of Medicine
- DO – Doctor of Osteopathic Medicine
- OD – Doctor of Optometry
- DPM – Doctor of Podiatric Medicine
- DDS – Doctor of Dental Surgery
- DMD – Doctor of Medicine in Dentistry
- DC- Doctor of Chiropractic
These individuals may qualify for the doctor loan program.
Doctor’s mortgage guidelines exclude student loan debt from the debt to income ratio. These programs require no down payment in most states. What really sets this program apart is the ability to qualify based on future income. Many doctors start with lower income thresholds and then maximize their earning potential a few years into their career. These programs allow medical professionals to purchase a home based on future income, which can greatly increase buying power!
Renovation Mortgage Programs
Jumbo Non-QM Lending Mortgages
Jumbo Non-QM programs are designed for borrowers who wish to finance more expensive homes. The loan amounts are too high for Freddie Mac, Fannie Mae or government-backed programs.
Applicants need at least 10% down for a loan with full, traditional income documentation and up to 30% down for large bank statement mortgages.
Non-QM Mortgages: Asset-Depletion Loans
Asset depletion is another way to qualify for a mortgage when the borrower has substantial wealth but limited income. Lenders determine the income by taking a percentage of the value of the investments (depending on the type of account) and dividing it by the number of months in the loan term.
Our product uses 100% of the account value and divides it by 60 months to come up with the borrower income. The loan can be used to purchase (up to 95% loan-to-value), refinance (up to 80% of the property value with a 680 credit score) or refinance with cash-out (up to 75% of the value with a 720 credit score).
The minimum asset amount is 110% of the loan amount plus reserve requirements. None of the down payment can be gifted. Borrowers can choose a ten-year interest-only period and a 40-year loan term. There can be no derogatory credit events in the last 24 months.
If the borrower had a credit event in the past 24-48 months, then the maximum loan-to-value is lowered to 65% LTV, and the reserve requirements are increased by 6 months of PITIA.
The program allows non-warrantable condos up to 85% and condotels up to 70%. Reserve requirement is six months for $2m or less, 12 months for loans exceeding $2m.
The maximum loan amount in most cases is $4m.
Non-QM Mortgages: Are They Right for You?
In most cases, a traditional QM loan has a lower interest rate and minimum down payment than a non-QM home loan. But even highly-qualified applicants may not meet the guidelines of QM mortgages. When applying for a mortgage, try a lender with flexible underwriting and no overlays like Gustan Cho Associates. If we can get you financed with a QM loan, we can save you money. And if not, we have more weapons in the form of non-QM mortgages.