Non-QM Loans
The emergence of non-QM was mainly brought about to offer real estate investors an alternative to the Government backed loans and programs.
NON-QUALIFIED MORTGAGES (NON-QM): Bank Statements, DSCR, and Alternative Lending
A Non-Qualified Mortgage (Non-QM) is any loan that does not meet the strict, low-risk underwriting guidelines of the Consumer Financial Protection Bureau (CFPB) for a Qualified Mortgage (QM). Non-QM loans fill a critical gap by providing financing to Self-Employed Borrowers and Real Estate Investors who have strong finances but whose income is obscured by tax write-offs.
I. The Self-Employed Solution: Bank Statement Loans
The most common Non-QM product for an owner-occupied primary residence is the Bank Statement Loan. This program addresses the common challenge faced by self-employed individuals: high income on paper versus low net income reported on tax returns after aggressive deductions.
How Bank Statement Income is Calculated
The Documentation Shift: From Tax Returns to Cash Flow
Instead of submitting IRS Form 1040 and Schedule C, the borrower submits 12 or 24 months of business or personal bank statements.
- Personal Statements: Lenders calculate the average monthly deposits and use 100% of that amount as qualifying income.
- Business Statements: Lenders average the monthly deposits and apply a **Expense Factor** (typically 50% to 90%) to account for unreimbursed business expenses. For example, if a borrower has $\$20,000$ in monthly deposits and the lender uses a $50\%$ expense factor, the qualified monthly income is $\$10,000$.
Underwriting Considerations
- LTV and Credit Score: Down payments are typically higher (starting at $10\%$ or $15\%$), and credit score requirements are generally stricter than FHA or VA (often $\ge 680$).
- Jumbo Bank Statement: Many Non-QM lenders offer these programs up to the $\$3$ Million mark and higher, blending the flexibility of alternative documentation with the high-loan limits of Jumbo products.
II. Investor Financing: Debt Service Coverage Ratio (DSCR) Loans
For acquiring investment properties (non-owner occupied), the **DSCR Loan** is the gold standard in the Non-QM space. This loan structure completely removes the borrower's personal income and DTI from the qualification process.
The DSCR Formula Explained
The loan qualifies the property, not the borrower. Qualification is based on the **Debt Service Coverage Ratio (DSCR)**:
DSCR = Gross Monthly Rental Income / PITI Payment
A ratio of $1.00$ means the property’s rent exactly covers the mortgage payment (PITI).
For approval, most lenders require a DSCR of $\mathbf{1.00}$ or higher. A ratio below $1.00$ (e.g., $0.75$) may still be accepted with a lower Loan-to-Value (LTV) and a higher interest rate, reflecting the increased risk.
Advantages of DSCR Financing
- No Income/Job Verification: Tax returns, pay stubs, and W-2s are not required. The loan focuses solely on the property’s cash flow potential, verified by a lease agreement or a market rent appraisal.
- Simplified Portfolio Scaling: Investors can scale their portfolios rapidly without having their personal DTI hinder the acquisition of new properties.
- Lower Credit Scores Accepted: While better rates are available for high FICO scores, DSCR loans can often accommodate scores below $660$, especially for higher down payments.
III. Other Unique Non-QM Categories
Beyond Bank Statement and DSCR, the Non-QM umbrella covers several other niche scenarios, providing access to credit for borrowers who have unique financial circumstances:
Recent Credit Events
Financing for borrowers who have recently experienced a bankruptcy, foreclosure, or short sale, often requiring only 1 day to 2 years seasoning instead of the standard 3-7 years.
Asset Utilization
Similar to Jumbo's Asset Depletion, but sometimes simplified for individuals who rely on stock portfolios or large asset balances without traditional employment income.
Foreign National / ITIN
Programs tailored for foreign investors or individuals using an Individual Taxpayer Identification Number (ITIN) instead of a Social Security Number for qualification.
Non-QM Analysis Complete: Finalizing the Resource
With Government, Conventional, Jumbo, and Non-QM loans covered, we have completed the core library of mortgage products. The final, essential step is to create a dynamic, single-page **Loan Comparison Tool** to bring all these options together.
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