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Non-QM Loans in Northern California

What is a Non-QM home loan? Basically, Non-QM is short for “Non-Qualified Mortgage” These are a type of specialty loan that is not limited to all the requirements from the Consumer Financial Protection Bureau (CFPB) and other government-sponsored enterprises (GSEs) involved with mortgage assistance and funding.

Other restrictions may also apply depending on the property, location, and other details of the transaction. If your loan is above the conforming loan limit determined by Fannie and Freddie, for example, it’s a non-conforming loan.

Aside from loan amounts, non-conforming loans are there to accommodate borrowers who fall outside the normal loan criteria for any number of reasons.

Note: Non-QM loans are not like subprime loans from the last housing crisis. Lenders will still make a good-faith effort to verify you can repay the loan (using their own guidelines to prove you can afford the monthly mortgage payments).

*Other restrictions and guidelines apply. Please contact lender for full program details.

Non-QM loan basics

The Non-QM, or sometimes referred to as Non-conforming loan programs, vary from mortgage lender to mortgage lender, but all are designed to solve the problems some borrowers face qualifying for a home loan due to self-employment, income from multiple sources, or even a credit ding in the past.

Non-QM loans are for people who may have found their dream home but were denied a home loan by traditional mortgage underwriting standards.

The borrower still needs to show proof that they can afford the mortgage obligations remains, but there is more flexibility for these special cases.

A non-qualified mortgage is often a temporary solution until you can better meet the standard mortgage guidelines. At that time, you can consider refinancing to a more traditional loan.

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Non-QM Loans At A Glance

The main benefit of this type of specialty loan is flexibility around your income or credit history.

While standard QM loans require you to verify your income in the traditional ways – with tax returns, W2s, and paystubs. However, a non-QM lender can use your bank statements to calculate income to qualify for your loan. Non-QM lenders often offer programs that allow you to borrow soon after a major recent credit event like a bankruptcy or foreclosure (so you don’t have to wait the two to seven years required by qualified mortgage loan programs).

This often comes at a cost in the form of higher-priced loans with more upfront points and fees. To offset the higher risk lenders take making non-QM loans, you’ll likely pay higher rates, APRs, and even extra upfront fees and points that aren’t generally applied to qualified mortgages.

There also may be a few somewhat risky and more costly effects of going with a non-QM option:

  • Interest-only payments. Lenders that offer an interest-only option don’t require you to pay any of your loan balance down but instead just pay the interest accruing each month.
  • Balloon payments. You’ll make a larger-than-usual payment at the end of a set time if your non-QM loan has a balloon payment.
  • Longer loan term. You may find a non-QM lender that offers terms longer than 30 years.

*Other restrictions and guidelines apply. Please contact lender for full program details.

WHO ARE A NON-QM LOANS FOR?

The Self-Employed

While standard loan programs require tax returns/documents to prove your self-employed income, non-QM lenders may offer a mortgage based on your bank statements with no need for filed tax paperwork.

The lender looks at deposits based on 12 – 24 months’ worth of personal or business statements to determine your qualifying income.

High net worth borrowers

Some lenders allow you to divide the total cash balance in an asset account by a lender-chosen time period and use the result for qualifying income. This is known as an asset depletion loan.

For example, a $200,000 savings balance may be converted into $833.33 of extra monthly qualifying income with a typical 20-year asset depletion loan term.

Recent Bad Credit

You may be eligible for a non-QM loan soon after completing a bankruptcy or foreclosure. You would typically need to wait two to seven years after a significant credit event for standard loan programs.

INVESTORS IN MULTIPLE RENTAL UNITS

Non-QM loans may be a good choice for investors who own more than 10 financed investment properties — the limit for most conventional lenders.

Other non-QM lenders offer debt-service coverage ratio loans for real estate investors. If the rent on the new home covers the monthly payment, you don’t need other income to qualify.*

FOREIGN NATIONALS

A foreign national in this case is a citizen of another country who lives in the U.S. for work or vacation – short term.

Non-QM loans for foreign nationals may not require proof of U.S. income, credit, or a Social Security number.*

Looking for AN INTEREST-ONLY PAYMENT OPTION

Sporadic income-earners may benefit from an interest-only loan that allows for a lower payment option during times of the year when they earn less. Note: Your payment could increase after the interest-only period ends, making the loan harder to repay.*

How do Non-Qualified Mortgages differ from standard mortgages?

Compare the features of standard “qualified loans” with non-QM.

INCOME DOCUMENTATION

Standard mortgage: Filed tax documents.

Non-QM: May allow bank statements instead.

DOWN PAYMENT

Standard mortgage: As low as 0%

Non-QM: Generally 20% or more.

DEBT-TO-INCOME (DTI) RATIO

Standard mortgage: Typically capped at 50%

Non-QM: Not required on some programs.

ASSET DEPLETION

Standard mortgage: Not allowed.

Non-QM: May be allowed.

CREDIT HISTORY

Standard: No bankruptcy or foreclosure within 2 – 7 years

Non-QM: Little/no time out of bankruptcy or foreclosure.

FINANCED PROPERTY LIMITS

Standard: not more than 10 properties.

Non-QM: No limit to the number of properties.

Non-QM loan underwriting

There are no uniform underwriting standards for non-QM loans, and lenders tend to specialize in certain types of non-QM products.

Interest rates and loan terms may vary widely from lender to lender. Statistics gathered by CoreLogic in the first three months of 2022 found the following common credit characteristics of closed non-QM loans:

  • The average credit score was 771.
  • The average down payment was 24%.
  • The average DTI ratio for non-QM home buyers was 37%.

Additionally, CoreLogic’s analysis puts forth the top three reasons borrowers chose non-QM loans:

  • More flexible documentation requirements.
  • Higher DTI ratio limits.
  • Option for interest-only payments.

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Let’s dig deeper into the advantages of Non-QM (non-conforming) loans

Flexible Terms

It’s in the name: Non-conforming loans are here to go against the grain. As such, they offer more flexibility than traditional lending guidelines. The looser rules with non-conforming loans allow lenders to create loan programs that meet borrowers where they are. This can mean a rate that is fixed for a specific amount of time before changing to an adjustable rate—or it can mean loan terms outside of the standard 15- or 30-year terms.

More Purchasing Options

Non-conforming loans are doing their own thing, right? So it’s no surprise that these lending vehicles can fund a broader choice of real estate than conforming loans. These include non-warrantable condos and co-ops, in addition to timeshares, fractional ownerships, units in assisted living communities, multi-unit condos, and units in projects that require a membership—such as a country club or a golf course—before you can buy. Non-conforming loans can also be used to purchase a condo that is currently in litigation.

Assets like condos or co-ops are typically considered non-warrantable if:

  • The project is still under construction.
  • Short-term rentals are allowed.
  • A single entity owns more than 10% of all the units.
  • The majority of the units are rented to non-owners.
  • The project’s developer has yet to turn over control of the HOA to the owners.

Remember, when you buy a unit in a larger project, your credit status isn’t the only one lenders must take into account. They will need to assess the developer’s credit as well and look at the project as a whole. For this reason, many borrowers within larger projects opt for non-conforming loans.

Credit Leniency

Non-conforming loan guidelines tend to have significantly more leeway when it comes to terms than conforming loans can offer. This extends to credit scores as well.

Conforming loans require a minimum credit score of 620. Do you know the credit score requirement for non-conforming loans? You’re right. They don’t have any.

Now, this doesn’t mean it’s a free-for-all out there in the non-conforming world. It simply means that lenders have more leeway over the credit terms than with more stringent loan programs.

Many borrowers with lower credit scores or credit report challenges seek out non-conforming loans for this reason. Since every loan program is different, you’ll want to discuss your unique financial situation, including your goals and any challenges and/or concerns you may have.

APM is happy to sit down with you and go over this before you apply to ensure that you know what your options are.

Flexible Income Verification

Verifying your income is a pivotal part of the loan application process, particularly since your debt-to-income ratio (DTI) has such a large impact on whether or not you can qualify for a loan.

This isn’t the case with non-conforming loans—or at least it doesn’t have to be. Income can be verified in a lot of nontraditional ways, such as bank statements or other documents that can prove your personal finances and income, or it can not be verified at all, depending on other factors of the transaction.

A non-conforming mortgage can take other parts of your financial picture into consideration, including your overall cash flow, home equity, and assets. For these reasons, non-conforming loans are often preferred by the self-employed and those who work on seasonal commissions.

These loans aren’t offered by all lenders, and they may come with additional terms, such as a higher interest rate or credit requirement, but they can be well worth it for borrowers who can’t qualify through the traditional route that involves income verification.

Lower Down Payments

Government-backed loans, including VA, USDA, and FHA loans, are also considered non-conforming. These loans tend to have lower down payment requirements than traditional conforming loans for those looking to buy a home. In fact, VA loans can even offer $0 down, with FHA loans going as low as 3.5% down.

Jumbo loans, another type of non-conforming loan, can offer as little as 5% down, though most lenders require somewhere between 10% and 15%.

Getting the Best Deal on a Home Loan

You might have noticed that “interest rate” was not one of the benefits listed above. That’s because this variable really depends on your situation and the type of non-conforming loan you’re applying for.

Certain loan programs like VA (a loan guaranteed by the U.S. Department of Veterans Affairs) and FHA can offer very attractive rates, while other programs, like a bank statement loan, carry higher rates in return for perks like limited income verification.

Like conforming loans, the terms you lock in for a non-conforming loan will be influenced by many factors. These include how much you want to borrow, the size of your down payment, your credit score, the exact loan program you apply for, and the type of property you want to purchase.

Don’t let these factors overwhelm you. US Lending Company is here to help you identify the right loan program based on your needs. Contact us to get started today.

*Other restrictions and guidelines apply. Please contact lender for full program details.

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