Non-QM Loans
Non-QM Loans: Tailored to Your Unique Financial Situation
Explore Our Home Loan Options
We make the mortgage process easy by working with numerous mortgage lenders, helping you find the right loan for your specific situation.
A non-QM loan can be the perfect option for self-employed borrowers – and Pride Lending can make it possible!
People from marginalized communities, including LGBTQ+ and BIPOC individuals, often need different financing options than the typical consumer due to their unique qualifications.
For example, 39% of Black individuals and 36% of Latino or Hispanic individuals report doing contingent work, also known as gig work, in comparison to just 23% of white people. Additionally, 36% of LGBTQ+ individuals report having a variable income, such as freelancing or being self-employed. While this can be freeing and help marginalized people overcome discrimination, it can also make it more difficult to access traditional mortgage products. Thankfully, there are many options to ensure you can get the home of your dreams.
A non-QM loan is a non-qualified mortgage, meaning that it does not meet the lending requirements set by the Consumer Financial Protection Bureau for sale on the secondary mortgage by Fannie Mae or Freddie Mac.
Not meeting this requirement does not mean that non-QM loans are inherently risky. Non-QM mortgages differ greatly from the subprime mortgages offered before the 2008 financial recession. Many of the risky features that endangered borrowers are now illegal, and non-QM lenders make significant efforts to protect both themselves and their borrowers from default.
A non-qualified loan means that non-QM mortgage lenders will use different methods to assess a borrower’s creditworthiness than those used in qualified mortgage standards.
Conventional lenders want to see specific information to assess a borrower’s ability to repay their mortgage. This includes tax returns, pay stubs, employment history, and credit scores. As such, qualified mortgages can be hard to access for anyone with non-conventional income streams.
Additionally, traditional loan lenders tend to deny loans to anyone with a low credit score or who has experienced a significant credit event, like foreclosure or bankruptcy, within a set period of time.
Non-QM loans are a good option for those who do not meet the qualifications necessary for conventional loans, including self-employed borrowers, foreign nationals, or investors who rely on rental income for most of their cash flow.
Why Choose a Non-QM Loan?
Thanks to alternative methods of identifying positive cash flow and more flexible qualification requirements, non-QM loans are more accessible than traditional mortgages.
If you’ve found it hard to qualify for standard loan programs, non-QM loans may be a great option for you.
Alternative Income Verification
To assess their risk, the Consumer Financial Protection Bureau’s guidelines for underwriting conventional mortgages require specific information about a borrower’s income, including tax returns and proof of employment.
However, this fails to acknowledge that freelancers, entrepreneurs, foreign nationals, and investors can have a stable income without this income documentation. With non-QM loans, lenders verify income through various other ways, such as looking at bank statements, assets, or property performance for investors.
Higher Debt-To-Income (DTI) Ratio Tolerance
Non-QM loans typically allow for a higher debt-to-income ratio than is possible with qualifying mortgages. For standard loan programs, you’ll find it difficult to get a home loan if you have a DTI higher than 36%, but non-QM loans offer more flexibility in this regard, sometimes up to 50%.
Options for Recent Credit Events
As banks are quite risk-averse, they only want to lend to prime borrowers: those who have great credit scores and no history of foreclosure. Those recently going through bankruptcy or foreclosure may struggle to find qualifying mortgage lenders who will work with them, as they are considered non-prime borrowers.
Non-QM loans can provide a helpful solution to this problem, especially for those with significant assets who have run into financial trouble. A non-qualified mortgage may also be a good choice for individuals with little to no credit.
Tailored Solutions for Investors and Self-Employed Individuals
Non-QM loans are used by investors to pay for real estate investments by using the property’s potential rental income to qualify rather than their personal income.
A non-QM lender will appraise the property and assess whether it can cover the loan balance by using the Debt Service Coverage Ratio, which divides the property’s net operating income by its debt service. This allows a faster and easier way to get a mortgage loan than a conventional mortgage, which is why even a prime borrower may choose a non-QM loan.
Self-employed borrowers also appreciate that non-QM loans can use different ways of measuring whether they can cover the monthly payment, including assessment of their business profits.
How to Demonstrate the Ability to Repay the Non-QM Loan?
Non-QM loans allow you to use different forms of income verification than would be possible with the typical mortgage loan. This includes 1099s for freelancers, a year of tax returns, bank statements, investment accounts, rental income, and proof of assets like other properties.
Difference Between Qualified and Non-Qualified Mortgages
While all home loans share some commonalities, such as set loan terms, mortgage payments, and down payments, there are distinct differences between qualified and non-QM loans, including the following.
Bank Statement Loans
Great for self-employed individuals, bank statement loans look at your income and assets to determine whether you can repay your home loan.
Asset Depletion/Utilization Loans
Also known as asset-based loans, these loans allow you to qualify based on the assets you already own, such as stocks, bonds, or other properties. The lender will assume that should you run into financial trouble, you will be able to liquidate these assets in order to pay off your non-QM loan.
Investor Cash Flow Loans (DSCR)
Geared toward real estate investors, DSCR loans assess whether the property you purchase can pay its own mortgage based on the expected income. It uses the Debt Service Coverage Ratio, which is the property’s net operating income divided by its debt service, such as mortgage, interest, property taxes, insurance, and homeowners’ association dues.
A ratio of 1.25 means that the property is making 1.25 times the cost of the mortgage payments when all its operating expenses are deducted. This is typically the benchmark that DSCR lenders use to determine whether you can qualify.
Foreign National Loans
This specialized option makes home ownership or investment possible for non-citizens of the United States, whether they live in the US or abroad. Depending on the type of loan you choose, you may not need a Social Security Number, green card, visa, or FICO score, which is necessary for qualified mortgages.
Instead, you will use tax and income information from your home country, as well as a US visa if you have one, to prove that you will be able to repay the mortgage.
Interest-Only Loans
Interest-only loans are typically short-term loans. With this option, you will make interest-only payments for a set period, which can significantly reduce your upfront costs. However, most will have balloon payments at the end of the period, where you need to repay the principal in a lump sum payment.
It is crucial that you watch out for negative amortization, which is when you’re not paying enough to cover all the interest on the principal. These loans increase in value over time, so your balloon payments may be significantly higher than expected.
Income Verification
With a qualified mortgage, your mortgage lender wants specific income information, which includes proof of employment, W2s, and pay stubs.
However, non-QM loans allow for more potential income verification, including tax returns, banking information, investments, or assets that can be used as collateral.
Loan Purpose
Conventional loans are usually provided to residential consumers to purchase a primary or secondary residence. While non-QM loans can also be used by consumers to buy a home, they are often geared toward investors, whose ability to repay the loan will be based on their assets or on the target property’s income rather than their own.
Loan Size
A qualified mortgage has limits on how much you can borrow. For example, conforming loans – those sold on the secondary mortgage market by Fannie Mae and Freddie Mac – must adhere to the conforming loan limit set by the Federal Housing Finance Agency. This varies by county, but the maximum is $1,149,825 in high-cost areas.
Non-QM loans do not have to meet these standards, so they can be much larger depending on whether you have prime credit and can repay the loan. Some lenders may offer $3 million or more, based on your purchasing area.
Down Payment and Rates
Because non-QM lenders cannot package and resell these loans, they are riskier for the mortgage company. As such, there are typically higher down payment requirements than for the typical loan; you may have to provide up to 20% depending on your credit profile and the loan amount.
However, there are some programs with low down payments, and Pride Lending can assist you in finding the right choice for your needs.
Additionally, interest rates are usually higher than for other home loan programs, thanks to the higher risk to the lender. This means your mortgage payment will be larger than with a qualified mortgage, a fact you must consider when deciding whether a non-QM loan is right for you.
Non-QM Loan Types
There are several different types of non-qualified mortgages geared toward different borrowing profiles. Our loan officers can assist you in deciding which type of non-QM loan fits your specific needs and financial goals.
The Non-QM Loan Process
The process of securing a non-QM loan is often faster than the usual mortgage process, but it has many of the same steps. Here’s what you can expect when you pursue non-QM options:
Check the Requirements
While a non-QM loan often has more relaxed requirements than other products, it’s still important to ensure that you match the stipulations of the loan, such as minimum score, debt-to-income ratio, and financial history.
Contact Pride Lending
Not every company provides these loans because of their risk. Our team will help you find great options for your specific needs, ensuring that the company you work with is safe and trustworthy. During your loan consultation, we’ll walk you through your options and ensure that you’re familiar with the facets of your chosen program.
Submit Your Details
We make it easy to get preapproved by providing an all-online process. In this step, you’ll provide details about your finances, including credit history, tax details, and debts. We’ll look over everything and work with you to determine how much you can afford.
Get Preapproved and Start Shopping
Preapproval helps you stay competitive in a tight market by demonstrating that you have been tentatively approved for a specific loan amount. It involves much of the same information that you will provide for the application. Work with a realtor who understands your specific needs, whether you are investing or finding a primary residence.
Submit an Offer
Once you’ve found your dream place, you will work with your realtor to submit a strong and competitive offer. We’re here to answer any questions you may have about your budget based on your approved amount.
Fill Out an Application
With your application, you’ll need to provide the financial information requested by the lender. If you’re buying an investment property, this will often include details about the home in question, as well.
Offer Acceptance
If your bid has been accepted, you and your realtor can now schedule an inspection to ensure that the property is exactly as you expected. You’ll sign a purchase agreement and start moving on to the next steps, which includes underwriting, appraisal, and approval.
Inspection
This is a crucial part of any investment, as it checks that there are no significant issues with the house that may cause issues in the future. In many cases, you can back out of the contract if there are significant problems that weren’t disclosed by the seller before signing the purchase agreement.
Conditions
When you’ve approved the inspection report, we’ll go over the contract with you and make sure that all the conditions are favorable before sending it over to the lender.
Begin Underwriting
This step takes place with the lender’s underwriting team; we do not underwrite loans in house. An underwriter will investigate all the details provided to determine whether you have a suitable risk profile according to lender standards. You may need to provide further details during this step, and we’re also here to answer questions you may have.
Appraisal
As with any other home purchase, the lender wants to ensure that the property is worth its purchase price. For investment homes, you may need to go through multiple appraisals.
Clear to Close
This means that your non-QM loan has been fully approved and you’re ready to officially take over the home. We will schedule the closing date with you, and the lender’s title company will send over details over how to make your payments.
Closing
The closing process includes signing paperwork for both your loan and the home. This involves transferring the title over to you, reviewing the Loan Disclosure Statement and approving the details, and paying your down payment and closing costs. With this, you’ve officially purchased your home.
Who Qualifies for a Non-QM Loan?
Because non-QM loans encompass a variety of different mortgage options and because lenders set their own requirements, eligibility will depend on the specific loan type you choose, as well as the lender’s specifications.
In general, you need to have at least a 620 credit score, though some lenders may allow for a lower score. You will also need to provide documentation of your assets and income, whether that is through 1099s, banking details, investment accounts, or rent schedules from your investment properties.
Additionally, expect to provide a significant upfront payment. Closing costs are often higher for these loans, and you may have to provide at least 20% of the loan amount at close.
Benefits of Non-Qualified Mortgage
Non-QM loan borrowers can enjoy various benefits over the typical mortgage loan, such as a longer or shorter loan term than would be possible with a qualified mortgage.
Access to Financing for Non-Traditional Borrowers
Marginalized people are significantly overrepresented in non-traditional professions. For example, 13% of freelancers identify as LGBTQ+, despite being less than 6% of the population. About 17% of self-employed individuals are Hispanic or Latino, while African-Americans make up about 10% of those in self-employment.
Freelancing can be a powerful way to override the pay gap: women who freelance make about 95% of what their male counterparts do, with self-employed women making about 96%. The freedom and flexibility is often particularly attractive for transgender and LGB individuals, who may fear discrimination in the typical workplace.
Despite the many advantages, however, there are some financial downsides, particularly around homeownership. Freelancers, entrepreneurs, and the self-employed often find it difficult to access mortgage products because of the strict guidelines provided by the Consumer Financial Protection Bureau to reduce risk in the mortgage industry.
Thankfully, a non-QM lender will consider alternative means of income verification that help borrowers with a strong credit profile to get good rates.
Portfolio Expansion for Real Estate Investors
Investors will appreciate the fact that DSCR loans, a type of non-QM loan, can allow them to package multiple properties into the same mortgage. This allows for faster real estate portfolio expansion than would be possible with a traditional mortgage product, which generally only funds one property at a time.
Faster Loan Processing and Approval
As less documentation is necessary for non-QM loans, the processing is much faster than would be possible otherwise. Depending on the complexity of the transaction and the amount of documentation that your lender requires, you may be able to get your loan funded in less than a month.
This is especially helpful for investors who want to purchase properties as fast as possible before they are snatched up by competitors.
Potential for Lower Initial Payments (Interest-Only Option)
Some non-QM loans allow for interest-only payments at first, which can help you build up your income stream before paying off the rest of the loan at the end of the period. This can be very helpful for those who are opening up a new business and need to keep their overhead low while they grow their revenue.
Why Choose Us for Your Non-QM Loan?
Pride Lending is the premier mortgage company for LGBTQ and BIPOC borrowers, including investors and self-employed individuals. We strive to make property ownership possible for those who have been traditionally sidelined by the mortgage industry, leveraging our years of experience on your behalf.
At Pride Lending, we find strength in diversity: our team is composed of allies and members of minority communities, including LGBTQ+ and BIPOC mortgage professionals. We are here to help everyone, regardless of their background or identity.
Our team is committed to finding the perfect loan solution for your needs, including non-QM loans for unique borrower profiles. We’re familiar with the many different documentation options for those who don’t fit the bill for a typical loan and can work with you to find a loan with terms you’ll love.
Pride Lending is a Certified LGBT Business Enterprise recognized by the National Gay and Lesbian Chamber of Commerce. We’re the first mortgage company in the United States focused specifically on LGBTQ+ borrowers. Our mission is to assist those in our community and ensure that people of all identities have access to property ownership.
Make a Step Towards Home Ownership With Pride Lending
If you’re ready to explore non-QM loans, contact Pride Lending today! We’re ready to help you find the right solution for your specific borrowing needs, whether that is buying rental properties or purchasing a home as a freelancer. Get qualified or speak to one of our experienced loan officers – all online.
