Non-QM Loans To The Rescue

By RJ Meyerhoffer, VP of Mortgage Lending

You’ve probably been hearing more about Non-QM (non-qualified mortgage) loans recently.
However, you may still be unsure about what they are and how they can benefit specific home
buyers. A non-QM loan is a type of loan that allows borrowers to qualify for a mortgage even if
they don't meet the traditional requirements for a qualified mortgage (QM loan). Think of it as an alternative for those buyers that do not fit neatly inside the box of a conventional mortgage loan.

Non-QM loans offer more flexibility in terms of income and credit requirements. For example,
instead of relying solely on W-2 forms and paystubs, lenders may consider alternative income
documentation such as bank statements, 1099s, assets or rental income. This can be especially beneficial for self-employed borrowers, freelancers, investors or people with inconsistent income. Additionally, non-QM loans may be an option for borrowers with a higher debt to income ratio or those who have experienced a credit event like a bankruptcy or foreclosure.

Whereas there are many Non-QM products available, let’s take a look at some of the more
commonly used products in today’s mortgage space.

Bank Statement Loans

A bank statement mortgage is a type of home loan that uses your bank statements to verify your income instead of traditional documents like tax returns. This can be beneficial for self-employed individuals or those with income that might be difficult to document on a tax return.

  • Eligibility: Primarily designed for self-employed borrowers or those with non-traditional income sources.
  • Verification: Lenders assess your bank statements (usually 12-24 months’ worth) to analyze your income consistency and ability to repay the mortgage. This typically involves an averaging of regular deposits into your business or personal bank account to formulate an average income.
DSCR Loans

A DSCR (debt service coverage ratio) loan is a type of financing specifically designed for real
estate investors who may not have a strong personal income but possess investment properties with solid rental income. Unlike a traditional mortgage, which focuses on the borrower's income, a DSCR loan prioritizes a property’s cash flow to determine eligibility.

  • Focus on Cash Flow: Instead of tax returns and paystubs, lenders assess a DSCR loan based on the property's ability to generate income through rent. This is measured by the debt service coverage ratio, which compares the property's net operating income (NOI) to its annual debt service (principal and interest payments).

  • Debt Service Coverage Ratio (DSCR): This ratio is obtained by dividing the NOI by the total debt service. A DSCR of 1.25 or higher is generally considered favorable by lenders, indicating the property generates enough cash flow to cover its debt obligations with some buffer.
Asset Utilization Loans

An asset utilization loan is a type of financing that allows you to borrow money based on the value of your assets, rather than your income. This can be helpful for people who have
substantial assets, such as savings, investment portfolios and retirement plans but may not have a traditional paycheck. Think self-employed borrowers and retirees.

  • Calculated Income: Lenders will often consider a portion of your assets, assuming a conservative rate of return, as part of your income for qualifying purposes. For example, they might divide your total assets by a certain number (like 60) to estimate your monthly income from those assets.

  • Focus on Liquidity: The main assets that qualify are typically those that are considered liquid, meaning they can be easily converted to cash. Your house, for instance, wouldn't normally be counted since selling it to access the cash takes time.
Non-QM loans offer many benefits, but it’s important to be aware of their drawbacks. They do come with higher interest rates and require larger down payments compared to traditional mortgages. Additionally, since they don’t follow the same guidelines as QM loans, they may provide fewer borrower protections. Reach out to a local mortgage lender to learn more about these programs and how they serve as a valuable tool toward homeownership.