Non-QM Mortgages

A non-qualified mortgage (non-QM) is a home loan that falls outside the Consumer Financial Protection Bureau’s (CFPB) guidelines for qualified mortgages. These loans are tailored for borrowers with non-traditional financial profiles, such as variable income or recent credit events, who may not meet conventional underwriting standards.

Within the non-QM space, there are five major tools that can be used to determine a borrower’s creditworthiness and to satisfy their ability to repay.

• Bank statements: The analysis of 12 to 24 months of personal or business bank statements can be used to determine a borrower’s ability to repay a loan.
• 1099 forms: The income from these non-payroll employee tax papers can be calculated to qualify for financing. These forms are common for gig economy workers, consultants, independent contractors, real estate agents or other workers who do not receive W-2 forms from their employers.
• Profit and loss statements: For self-employed individuals with complicated bank statements or multiple lines of businesses, profit and loss statements prepared by a CPA or tax preparer can be used as qualifying income.
• Using assets: This solution is for individuals who are asset or cash rich but income-challenged. It includes scenarios where individuals have significant assets but do not have two years of tax returns or sufficient bank statements. For example, consider the case of someone who sold their business in California, then moved to Texas and started another business between 12 to 15 months after relocating. They may not have two years of tax returns or sufficient bank statements tied to their new endeavor, but they have $5 million in the bank and good credit.
• Debt service coverage ratio (DSCR):This metric measures the property’s ability to cover its debt obligations with rental income cash flow. Real estate investors often obtain non-qualified mortgages based on the cash flow of the property and not their personal income while allowing them to close in an LLC.