Buying a home is an investment, and for many people, it requires a loan. When it comes to buying, most people think of traditional conforming mortgage loans as the only option for financing, but that’s not the case.
For borrowers who cannot or do not wish to route through the traditional loan procedures, there are several alternative financing options that can help homebuyers achieve their dream of homeownership. They are called non-qualified, non-conforming mortgage (Non-QM) loans. And, with the rise of the gig economy, they have become quite popular.
Plenty of qualified borrowers don’t fit the “traditional mold” of requirements set by Fannie and Freddie. In fact, “one in 15 current home borrowers, approximately seven million Americans, use alternative financing,” to purchase a home, according to data from The New York Times. In this blog, we'll explore what that means and some of the alternative financing options, primarily Non-QM loans, for non-traditional homebuyers.
What are Non-QM loans?
Non-QM (Non-Qualified Mortgages) loans are mortgage loans that do not meet the qualified mortgage (QM) criteria set by the Consumer Financial Protection Bureau (CFPB). There can be several reasons that borrowers might not meet “traditional” qualified mortgage (QM) criteria, from, “not meeting the traditional income or credit requirements of a conventional mortgage,” to being self-employed or having a higher debt-to-income ratio, according to sources from HomeAbroad.
Non-QM loans are for borrowers who don’t meet the “traditional” Qualified Mortgage (QM) criteria but are still creditworthy.
Why are Non-QM loans beneficial to borrowers?
- They have less strict guidelines, making them accessible to those in unique financial situations, self-employed individuals, have a 1099 (contract worker) or are freelance, those who might be missing documents, lack US credit history, individuals who invest in real estate, have a surplus of alternative assets that they want to use toward loan qualification, and/or have a high-net-worth.
- “A Non-QM loan can make homeownership possible” for creditworthy borrowers who can afford a mortgage but have experienced qualification difficulties.
- They have more flexible underwriting standards, including the ability to use alternative forms of income verification, such as bank statements, alternative asset-based income, or rental income and options for no tax returns.
- Several types of Non-QM loans are available, each designed to meet different borrowers' needs and circumstances.
Types of Non-QM loans
Bank statement loans
Primarily for self-employed borrowers or those with non-traditional income sources such as freelancers. Instead of relying on employment information like tax returns or W-2s, these loans use bank statements (typically covering the past 12-24 months) to verify income.
Alternative Asset-based loans
Designed for borrowers with significant assets who are high-net-worth but have lower income levels. These loans review the borrower’s total net worth and use the borrower's assets, such as investments, real estate, cryptocurrency, and/or savings, as collateral for a loan instead of income.
Foreign national loans
Designed for non-US citizens looking to buy a home in the United States. Lenders will consider factors such as the borrower’s income, credit history, and residency status when evaluating their application for a loan.
Allow borrowers to pay only the interest on the loan for a set period of time, with adjustable rates and no requirement for a principal paydown. This is great for self-employed borrowers and can help lower monthly payments giving flexibility to managing cash flow.
A real estate investor's loan where the borrower can qualify using rental income. It looks at the investment properties' cash flow (DSCR) instead of traditional means of qualification.
A record of how much your business has spent and earned over a certain amount of time. P&L statements are great for business owners and can be used to verify income from a business, which can be used toward loan qualification purposes.
Great for real estate investors looking to fund the construction of their second home or investment property or make renovations to an existing property. No tax returns are necessary, and investors can use construction loans to fix and sell or fix and hold.
Home Equity loans
A HELOC or Home Equity Line of Credit is a type of loan that allows homeowners to borrow against the equity in their homes. Borrowers can create dry powder (low-risk assets/reserves that can be converted into cash) to capitalize on opportunities, unforeseen expenses, fund home renovations or pay off high-limit credit cards.
The rise of Non-QM loan popularity
Since its all-time low of 2% market share in 2020, Non-QM popularity has increased exponentially, almost doubling in 2022, representing about 4% of the mortgage market, according to CoreLogic. (Check out one of our recent articles HERE for more on that.)
Non-QM loans continue to bridge the gap between creditworthy homebuyers with qualifying criteria outside the QM rule box, and the ability to still obtain a mortgage. With all the different types of Non-QM loans available, it's important to do your research and compare options to find the right fit for your unique circumstances. As always, we are here to help.
At Defy Mortgage, Non-QM is our specialty. We offer a portfolio of competitive Non-QM programs from bank statements, DSCR, and construction loans, to interest-only and alternative asset-based loans. Interested in hearing more about our alternative financing options and how we can help you? We’d love to hear from you. Contact us here.