What do you do if you are self-employed and don't have the usual W2 or pay stubs to provide the lender for loan approval? There is a thing called a non-qualified mortgage (also referred to as a non-QM loan) that you may want to explore in this situation. Below is more information about non-traditional loan programs to help guide you. As always, the best option is to talk to a qualified mortgage provider to get the most accurate and up-to-date information. If you need a recommendation for a mortgage provider, don't hesitate to reach out to me and I am happy to provide you some good options.
Benefits of a Non-QM Loan
A Non-QM loan provides expanded borrower criteria that may serve as a better option to self employed individuals or others including retirees, real estate investors, borrowers with high debt-to-income ratios and borrowers with blemishes on their credit history. If you are having trouble qualifying for a traditional loan, this may be a viable option to help you purchase your dream home.
The Consumer Financial Protection Bureau (CFPB) maintains standards for determining a borrower’s ability to repay a home loan. Lenders typically determine if you meet the requirements by looking at documents such as:
Self-employed borrowers may not have traditional W-2s or pay stubs to qualify for a traditional mortgage. When these documents are not available, you may be able to use alternative forms such as past tax returns, bank statements or 1099 forms with a non-QM mortgage loan.
Non-QM loans come with greater risk to the lenders because they cannot be purchased by Fannie Mae or Freddie Mac. They also can’t be backed by government agencies such as the Federal Housing Administration or USDA. Because of the assumed higher risk, that affects buyers in the form of higher interest rates compared to conventional mortgages. This is something to consider and plan for since it will affect your monthly mortgage payments.
Higher costs are also involved in purchasing mortgage points to lower the interest rate.
Similarly, there may be additional administrative fees associated with a non-QM mortgage which can add to the total cost.
Some non-QM loans may come with loan periods that exceed 30 years. This keeps borrowers locked into a mortgage for a longer period and can also increase the total amount you pay for your home.
Interest-only loans present the possibility of something called “negative amortization.” This happens when your monthly payment fails to cover the entire interest payment accrued during the month. As a result, your total loan will increase over time.Balloon payments are also a possibility with interest-only loans. Since you’re only making interest payments, you’ll eventually have to cover the principal. This can leave borrowers facing a massive balloon payment at the end of their loan.
Eligibility Criteria for a Non-QM Loan
The exact criteria for qualifying can vary by lender, but a non-QM loan will offer greater flexibility than traditional loans.
You can meet the requirements for a non-QM loan even if your credit score is fair or even poor. Most non-QM loans are available for borrowers with a credit score of 620, while some non-QM programs open the door to borrowers with credit scores as low as 580 or even 500.
For a traditional loan, your lender will typically expect you to have a debt-to-income ratio of 43% or lower. But non-QM loans are available even to those whose debt-to-income ratio is 50% or even higher — providing loan options to those whose debts might otherwise disqualify them from homeownership.
Ability to Repay
When you apply for a traditional loan, the lender will abide by the CFPB’s standards to determine your ability to repay the loan. This usually means vetting your finances by examining your tax forms, W-2s, etc. But as noted above, non-QM loans allow borrowers to look at other documents to determine their ability to repay the loan. This provides opportunity to non-traditional borrowers.
Common Types of Non-QM Loans
Non-QM loans come in many forms. Here are some of the most common types of non-QM loans.
Bank Statement Loans
Some lenders provide non-QM loans only by reviewing your bank statements. This often requires 12 months of past bank statements. However, some lenders can offer loan options with as little as two months’ worth of statements.
Asset Depletion Loans
Asset depletion loans allow you to use other liquid assets to secure a mortgage without having to rely on your day-to-day income. Basically, you’re using your other assets as a type of collateral. Lenders will approve the loan under the assumption that they may seize your checking account, investment accounts, or other assets to repay the loan.
Recent Credit Event Loans
Have you experienced a recent credit event, such as a foreclosure or bankruptcy? If so, you can still qualify for a non-QM mortgage through a recent credit event loan. Be advised that the loan terms may not be ideal, especially if the credit event has been very recent. But these programs still provide opportunities for those who have experienced a period of financial hardship.