A Guide for Homebuyers and Investors
When you need a mortgage, most people come think of conventional loans and government-backed loans (like FHA loans). But, not everyone fits into the lending criteria for traditional qualified mortgage loans.
If you're self-employed, have fluctuating income, or don’t meet standard lending requirements, a non-QM loan might be the perfect solution. But what exactly is a non-QM loan, and how does it work? Peregrine Financial's team of Non-QM mortgage lenders in Santa Clarita are spilling the details.
Understanding Non-QM Loans
A non-QM loan actually means a non-qualified mortgage. It's a type of mortgage that does not meet the strict guidelines set by the Consumer Financial Protection Bureau (CFPB) for qualified mortgages (QM). The guidelines are in place to make sure borrowers generally have the ability to repay their loans based on traditional income and credit verification methods.
Non-QM loans provide alternative options for borrowers who may not qualify for a traditional home loan because of their unique financial situation. Instead of using standard documentation like tax returns and W-2s, lenders can use other forms of income verification, such as bank statements to show a borrower's income or monthly payment trends, asset depletion, maybe even minimum credit score, or profit and loss statements.
The Best Mortgage Loan for a Self-Employed Individual Could Be a Non-QM Loan
Non-QM loan borrowers usually don’t meet traditional lending criteria set forth by, say, an institution like Fannie Mae. Some of the most common borrowers include:
Self-Employed Individuals: If you run your own business and write off significant expenses, your tax returns may not accurately reflect your true income. A non-QM loan allows you to qualify using bank statements or other financial records.
Real Estate Investors: Investors who rely on rental income may not have traditional pay stubs. Some non-QM loans focus on cash flow from investment properties rather than personal income.
Borrowers with High Debt-to-Income Ratios: If your debt-to-income (DTI) ratio is higher than what conventional lenders allow, a non-QM loan might be an option.
Foreign Nationals: Individuals who don’t have a U.S. credit history but have substantial assets and income may use alternative documentation to qualify.
Individuals with Credit Challenges: If you have a recent bankruptcy, foreclosure, or other credit issues, a non-QM loan may still be available to you.
How Do Non-QM Loans Work?
Non-QM loans operate differently from traditional mortgages. Here’s what you need to know about how they work:
Flexible Income Verification: Instead of relying solely on tax returns, lenders may use 12-24 months of bank statements, asset statements, or rental income documentation.
Higher Down Payments: Because non-QM loans carry more risk, lenders often require larger down payments, typically ranging from 10% to 30%.
Higher Interest Rates: Since non-QM loans do not conform to traditional lending guidelines, they often have higher interest rates to compensate for the increased risk.
Shorter Loan Terms: Some non-QM loans have shorter loan terms or balloon payments, meaning the full loan amount may be due after a set number of years.
Common Types of Non-QM Loans
Non-QM loans come in various forms, tailored to different borrower needs. Some popular types include:
Bank Statement Loans: Designed for self-employed borrowers who use bank statements instead of tax returns to verify income.
Asset-Based Loans: Also known as asset depletion loans, these allow borrowers to qualify based on their liquid assets rather than income.
Debt-Service Coverage Ratio (DSCR) Loans: Used by real estate investors, these loans focus on the rental income generated by the property instead of the borrower’s personal income.
Interest-Only Loans: Borrowers make interest-only payments for a set period before starting to pay down the principal.
Is a Non-QM Loan Worth It?
A non-QM loan can be a great option if you have a unique financial situation that makes it difficult to qualify for a traditional mortgage. However, it’s important to weigh the pros and cons before making a decision.
Pros:
Greater flexibiliility in income verification.
Opportunities for borrowers with credit challenges.
Access to financing for self-employed individuals and investors.
Ability to qualify with alternative documentation.
Cons:
Higher interest rates and down payments.
Stricter loan terms, such as shorter repayment periods.
Limited lender options compared to conventional mortgages.
Non-QM Loan Officers
A non-QM loan provides an excellent opportunity for borrowers who don’t fit traditional lending criteria. Peregrine Financial is a Non-QM mortgage loan broker in Santa Clarita that helps clients get the loan they need, based on their financial profile. If you’re self-employed or a real estate investor, reach out to our team today.
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