Who non-QM loans are designed for
A “qualified mortgage” follows a fixed set of documentation and debt-ratio rules, which suits a borrower with steady W-2 pay. Plenty of creditworthy people do not fit that mold. Non-QM lenders write their own guidelines so they can lend to:
- Self-employed borrowers whose tax returns show large business write-offs and therefore low taxable income.
- Real estate investors who want to qualify on a property’s rent instead of personal income. DSCR loans are the best-known example.
- Commission, gig and seasonal earners whose income varies month to month.
- Asset-rich borrowers who hold substantial savings or investments but draw little monthly income.
- Borrowers rebuilding after a credit event, such as a past foreclosure, short sale or bankruptcy, once enough time has passed.
Common non-QM programs
Bank statement loans. The lender reviews 12 or 24 months of personal or business bank statements and averages deposits to estimate income. Business statements are usually reduced by an expense factor, so the income used is lower than total deposits.
Profit and loss (P&L) loans. A CPA, tax preparer or enrolled agent prepares a P&L statement that the lender uses in place of tax returns.
Asset depletion loans. Qualifying income is calculated by dividing eligible liquid assets over a set number of months.
DSCR loans. The property’s rental income, compared with its monthly payment, decides approval. Personal income is generally not documented.
Interest-only and jumbo options. Some non-QM lenders offer interest-only periods or loan sizes above conforming limits.
What to expect on terms
Terms vary widely by lender, property and borrower, so treat these as common patterns rather than quotes:
- Rates and fees are usually higher than on comparable conventional loans, because the lender carries more risk and often cannot sell the loan to Fannie Mae or Freddie Mac.
- Down payments of 10% to 25% or more are common, with better pricing at lower loan-to-value ratios.
- Credit score minimums often start in the 600s, and pricing improves at higher scores.
- Reserves of several months of payments in liquid funds are frequently required.
- Prepayment penalties are common on investor products. Ask exactly how long they last and how they are calculated.
A note on the rules
Loans on a home you will live in are covered by federal ability-to-repay requirements, so lenders still have to make a reasonable, documented determination that you can repay. Loans made for business purposes, such as a rental property, are generally outside those consumer rules, which is one reason guidelines differ so much between lenders. Either way, read your loan estimate and closing disclosure carefully.
Advantages and drawbacks
Advantages: flexible income documentation, faster underwriting for unusual files, and options that conventional lenders do not offer.
Drawbacks: higher cost, larger down payments, fewer lenders to compare, and terms such as prepayment penalties that can be expensive to exit.
Questions to ask any non-QM lender
- Which documentation type fits my situation, and what income will you actually use?
- What is the total cost: rate, points, origination fee, appraisal and other closing costs?
- Is there a prepayment penalty, and how long does it last?
- Is the rate fixed or adjustable, and when can it change?
- How many months of reserves are required, and what counts as a reserve?
- What is a realistic timeline from application to closing?
Alternatives to consider first
If you can show two years of tax returns with sufficient income, a conventional or FHA loan will usually cost less. Compare both before choosing a non-QM product. Our guide to non-QM loans for self-employed borrowers goes into documentation in more detail, and the loan calculators can show how different rates change your payment.