What is a Non-QM Loan?
Mortgage lending is a detail-oriented endeavor, and anyone who has bought a home and gone through the underwriting process can likely verify this. When you work with a lender like JVM Lending, our expert analysts are working to ensure that your loan will meet all of the restrictive guidelines for your specific loan type and gather any documentation we will need. The work our team puts in upfront ensures that you will be able to pay back your loan on time and without issue.
While this level of documentation is required for most traditional financing options, there are alternative options for buyers who may not “fit into the mold” of a standard homebuyer.
For these clients, we can explore “non-qualified mortgages” – commonly referred to as non-QM loans – which fall outside of the requirements set forth by the federal government and the Consumer Finance Protection Bureau (CFPB).
Non-QM loans do not need to meet common requirements set in place for conventional, FHA, or VA loans. In many ways, these loans avoid federal oversight that allow for the same flexibilities subprime mortgages offered before the 2008 housing crisis. Although this may sound unappealing, this does provide a route to homeownership for buyers who might feel excluded from the current qualified mortgage loan guidelines.
Some of the key items with non-QM flexibility are “ability to repay” rules (income-based qualification), minimum credit requirements, and loan repayment rules (interest only, negative amortization options).
Although non-QM loans provide leniency for non-traditional borrowers, they come at the cost of higher interest rates, origination fees, and longer closing timelines. There is likely no advantage to pursuing a non-QM loan if a conventional loan is available to you, as these loans also come with a higher risk of default if you are ultimately unable to repay the loan.
When traditional financing is not possible, we recommend consulting one of JVM’s mortgage experts, who can help you weigh the risks against the rewards.
Who are Non-QM loans for?
- Self-employed borrowers with large write-offs or less than two years of filed tax returns
- Buyers with large asset portfolios without a stream of income
- Investors who wish to use future cash flow to qualify for investment properties
- Borrowers with non-traditional income, credit, residency, or any standard documentation
The main non-QM loan types we have at JVM are bank statement loans, asset qualifier loans, DSCR (investor cash flow) loans, and foreign national loans. We discuss each of those loans in more detail below.
Interest Rates for Non-QM Loans
Non-QM lenders will offer much higher interest rates and higher fees to compensate for the higher risk level of these unregulated loans. While rates can vary depending on the loan type and current interest rate environment, it is safe to assume that rates can land in the 8-12% range at the cost of 1-2 points for origination.
Based on recent history, we would expect non-QM rates to remain at least 3 – 4% higher than comparable conventional or FHA loans. Since these loans have flexible repayment options such as interest-only payments and longer loan terms, the monthly payments with these higher interest rates can be softened with future planning to pay off the loan, sell, or refinance.
View mortgage rates for April 10, 2024
Pros/Cons of Non-QM Loans
Pros
Alternative Qualifying Options
Non-QM loans offer alternative qualifying options for clients who may not fit the parameters of a more traditional conventional, FHA or jumbo loan but have the means to qualify for a mortgage payment. In addition to options for clients who do not generate consistent income, non-QM loans are often more lenient regarding debt-to-income ratios and credit scores.
Lenient Credit Guidelines
Non-QM loans can be a great option if you have less-than-perfect credit, with minimum credit scores as low as 600, depending on the program. There are also options if you have a recent credit event, such as a bankruptcy, foreclosure, or short sale.
Additional Loan Structures
Additional loan structures are available with non-QM loans, such as 40-year terms and interest-only payments.
Cons
Higher Interest Rates
Interest rates for non-QM loans are higher than loans for more traditional financing as Non-QM loans have “riskier” features. Rates vary on the program but typically land in the range of 8-12% at the cost of 1-2 points.
Longer Closing Timeline
Because guidelines for non-QM loans are less standardized and there is more flexibility when it comes to obtaining exceptions, the underwriting process is typically longer than for a conventional or jumbo loan. You should expect at least 30 days to close a non-QM loan, whereas conventional loans can close in as little as 14 days.
Higher Risk of Default
Without the government regulation that’s provided for qualified mortgages, there is a higher risk of default if the loan cannot be repaid. The lack of standardization for similar subprime loans prior to the 2008 mortgage meltdown resulted in many borrowers being unable to pay their loans because their lenders did not require income qualifications. With this being the case, you may want to look for long term solutions to ultimately qualify for conventional financing via a refinance in the future, if possible.
Types of Non-QM Loans
Bank Statement Only Loan
Benefits
- Minimal documentation – no tax returns required!
- Available for owner-occupied, second homes, and non-owner occupied purchases
- Available for purchases and rate/term refinances
Eligibility
- Minimum 10% Down Payment
- Credit Scores starting at 600
- Two years self-employed required
What is a Bank Statement Only loan?
Bank statement only loans are a great loan solution for self-employed borrowers who may not qualify through traditional financing methods. Our bank statement only program allows borrowers to demonstrate the true cash flow of their business through their business or personal bank statements.
Traditional financing for self-employed borrowers requires substantial documentation such as tax returns, W2s, and 1099s. However, these may not always be indicative of the profitability of the business (i.e. substantial tax write offs, fluctuations in business cycles, etc.). This program allows buyers to avoid this, and instead submit either 12 or 24 months of their personal or business statements to demonstrate business cash flow.
Asset Qualifier Loan
Benefits
- No income or employment verification required
- Great for those with substantial liquid assets
- Available for purchases and refinances
Eligibility
- For primary residence only
- 25% minimum down payment
- Buyers must maintain at least $500,000 in assets post-closing
- Must provide 6 months of bank statements and source all large deposits
What is an Asset Qualifier loan?
An asset qualifier loan is for borrowers who have significant liquid assets on hand, but may not qualify through traditional mortgage financing methods. This program analyzes buyers’ available liquid assets in relation to the proposed loan amount and other recurring monthly liabilities. Borrowers do not have to worry about submitting any income-related documents.
This program may be extremely helpful for retirees who may not meet traditional income requirements but can demonstrate substantial liquid assets.
DSCR Loan (Investor Cash Flow)
Benefits
- No income or employment verification required
- Qualify only based on rental income
- Available for purchases and refinances
Eligibility
- Minimum 20% Down Payment
- Credit Scores starting at 700
- Borrowers must own a primary residence
- Available for non-owner occupied properties
What is a DSCR loan?
A DSCR loan, also known as investor cash flow program, allows buyers to qualify based on the expected rental income from the subject property. Qualification is simply determined by whether the property’s expected cash flow exceeds the monthly payment. With a down payment of at least 25% and a credit score of at least 720, this cash flow requirement is automatically waived. Buyers do not need to submit any income-related documents, which saves time and headaches later down the road.
Foreign National Loan
Benefits
- No income or employment verification
- Qualify only based on rental income
- Available for purchases and refinances
Eligibility
- Allowable VISAs: B-1, B-2, H-2, H-3, I, J-1, J-2, O-2, P1, P2
- No gift funds allowed
- Minimum 30% down payment for purchases
- Buyer cannot live or work in the United States
What is a Foreign National loan?
A foreign national loan is a program specifically designed for non-U.S. citizens looking to purchase or refinance an investment property in the United States.
Qualification is similar to our investor cash flow program, as eligibility is determined through the property’s cash flow. Borrowers do not need to submit any income or employment verification documents.
Is a Non-QM Loan right for you?
There is no one-size-fits-all for mortgage financing. The best way to determine whether a non-QM loan makes the most sense for you is to talk to one of our mortgage experts at JVM Lending. Our experts can walk you through monthly payment scenarios, give you current interest rates, and discuss any other questions or concerns you might have.
