What is a Non-QM Loan?
A Non-QM loan is a type of mortgage loan that is not backed by Fannie Mae or Freddie Mac, meaning that it is not subject to the same underwriting guidelines as traditional mortgage loans. Non-qualified mortgages often do not meet standard mortgage underwriting rules, such as debt-to-income ratio requirements. They are still approved due to other factors such as the borrower's credit score or income history.
Who is eligible for a Non-QM Loan?
Non-QM loans are particularly suitable for borrowers who do not meet the underwriting guidelines set forth by Fannie Mae and Freddie Mac. These types of loans are designed for those who may have difficulty securing a traditional mortgage loan due to factors such as poor credit, income inconsistencies, or a higher debt-to-income ratio. The eligibility for this varies based on the specific requirements of the lender.
What are the benefits of a Non-QM Loan?
Non-QM loans offer many benefits to borrowers who may not qualify for traditional mortgage loans. Non-QM loans often offer more favorable terms compared to other loans that fall outside traditional guidelines. Borrowers may be able to secure a lower interest rate or pay a lower down payment, making homeownership a more achievable goal. This program also offers a viable solution for self-employed individuals whose income fluctuates month to month.
What are the requirements for obtaining a Non-QM Loan?
Non-QM loans vary based on the individual requirements of the lender, but there are certain factors that are common across most non-qualified mortgage issuance. Borrowers will need to provide documentation verifying their income, employment history, and credit score. Non-QM loans also often carry higher interest rates and fees than traditional mortgage loans, as they are considered riskier by lenders.
Borrowers should also expect to go through a more thorough underwriting process, as lenders will want to be sure that they can afford to repay the loan.
It is also essential to note that Non-QM loans will require a significant down payment when it comes to financing the loan. While the exact percentage may vary, borrowers should expect to pay up to 20% of the home's purchase price as a down payment.
Contact Shaun Meller - Quintessential Mortgage Group today to learn if a Non-QM Loan is right for you!
Example Scenarios
Scenario 1:
Client M.B., who is self-employed, was purchasing a new primary home condominium to scale down from her house. She owned her current house with substantial equity. Instead of getting a loan on the new condo and having to get the condominium building approved as well, she did a cash out refinance on her primary home to purchase the condominium in cash. She was able to win the bid with a no-mortgage contingent offer since her mortgage was on her current house, not the condo being purchased. She took out a new mortgage with an interest-only payment for $850,000 on her current home, consisting of almost all cash out. There was NO limit on the cash out, which most lenders would require, since she still had a relatively low loan-to-value.
In addition, because she had substantial deductions on her tax return, she would not have qualified using conventional documentation. We used her business bank statements for the past 12 months to qualify her using just her business deposits. Since the deposits were also insufficient, we were able to supplement her income using asset utilization, including retirement assets (even though she wasn’t yet retired), dividing the available assets over 60 months to get her qualified. We just needed the bank statements – no need to liquidate or use the assets at all.
She closed on her loan, and she will shortly close on the purchase of the condominium in cash, and then sell her current primary home and pay off the mortgage!
Scenario 2:
Client M.S., who is retired, was purchasing a new home in the same area where he has his current primary residence. Since his retirement, M.S. had been unable to show sufficient income for the new purchase. We did the purchase as an investment property using a Debt Service Coverage Ratio (DSCR) loan, using just the expected rental income on the property as determined by the appraiser, even though the house was vacant. The income is then compared to the total housing expense consisting of the mortgage payment, property taxes and homeowners insurance. The rental income came in far below what was anticipated, BUT because Milton had a sufficiently high credit score and at least 25% to put down towards the purchase, he was able to qualify for the loan.
M.S.’s plan is to eventually sell his current primary home and pay off the loan on the new property!
Scenario 3:
Client D.B. and his family were looking to purchase a new home. They sold their former home and had been renting for just a few months, eagerly looking forward to putting the proceeds from their sale into a new home. Unfortunately, the credit scores were too low to qualify for a conventional Fannie Mae loan, and also below the threshold for most lenders who work with FHA. David had already notified his landlord that he was vacating the apartment and even lined up someone to take it over with a new executed lease. We advised David to pay down a few of his credit cards to balances below 10% of the available line. We then pulled a new credit report immediately after the cycle end date, and his credit score jumped over 30 points! In conjunction with an explanation for circumstances beyond his control, we were able to get his FHA loan approved.
D.B. and his family are now happily living in their new home!
