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Non-Qualified Mortgage Loans

What is a Non-Qualifying Mortgage?

Non-Qualified Mortgages (also called Non-QM Loans) generally have less strict underwriting guidelines for borrowers and are aimed at borrowers whose financial profile may not fit with a typical mortgage. Through the process of applying for a typical conventional or government-backed mortgage, the borrower will need to provide various documents to prove their income and assets. If they have trouble providing these documents or they have a unique situation, you may want to consider the following products available.

When to look into Non-Qualified Mortgages?

Recent Mark on Credit

If your customer has recent derogatory marks on their credit report, they may not qualify for a conventional loan. These are marks such as a foreclosure, bankruptcy, missed payments on a mortgage, etc.

New Self-Employment

If your customer is newly self-employed (under two years), they may not qualify under the conventional guidelines. A non-QM loan is likely to be the best fit as long as their company’s income is strong.

Avoid Hassle of Processing

Non-QM Loans tend to require less documentation. If your client is a high net worth individual or is looking to purchase an investment property based off of the income the new property is making, they may be a good fit for Non-QM.

Recently Retired

If your customer is recently retired and their income is falling short of conventional guidelines, a non-QM loan may benefit them in order to show they have enough assets to cover expenses.

Non-Qualifying Mortgage Types at Morty

Through our lender partners, Morty has access to various Non-QM programs. These are subject to change and are subject to the lender’s underwriting and guidelines. Browse through each program below to read about the benefits and drawbacks of each.

Overview

Designed for self-employed borrowers with strong credit quality. This program permits the use of bank statements, in lieu of tax returns, to validate self-employed income.

Benefits

Gives self-employed borrowers a greater chance of qualifying if their current income is greater than what is reported on the prior year filed tax returns. This is particularly useful for borrowers whose business has recently started making more net profit but won’t be able to show this on tax returns until the following year.

Drawbacks

The underwriting process requires a lot of documentation. Bank statement loans require, at a minimum, 12 months of statements from the borrower’s business and/or personal bank accounts as well as additional information about the business structure and industry. 

There are also generally lower maximum LTV limits than conventional loans which means bank statement loans require more funds to close.

Generally higher rates and FICO requirements compared to conventional.

Overview

Borrowers who are independent contractors, freelancers, or otherwise self-employed in the “gig economy” may qualify with their 1099 forms in lieu of tax returns, to support their income. This program benefits borrowers who have recently increased their earnings but haven’t yet filed tax returns to get credit for that income. 1099 workers are generally considered self-employed in the eyes of conventional loans and are typically subject to extra scrutiny when applying for a conventional loan.

Benefits

Borrowers who work for multiple employers as a 1099 worker can be credited for their full, combined income, rather than the primary employer with the most income, which would be the conventional standard.

Drawbacks

The calculated qualifying income is still averaged over 2 years (similar to typical self-employed guidelines).

The borrower must be self-employed for 2 years minimum.

There is a lower max LTV compared to conventional or government loans.

Overview

DSCR (Debt Service Coverage Ratio) Loans are geared towards borrowers that are purchasing an investment property and want to use the future income of the investment to qualify. This program is not typically available to first time homebuyers. This loan doesn’t require any proof of personal income or employment history. The rate can change and be determined by how “good” the DSCR ratio is after calculated by the underwriter. The DSCR ratio determines how much of the monthly debt the property will cover by itself.

Benefits

No proof of personal income or employment history is required.

There are no DTI restrictions,

Seasoning requirements for serious derogatory events like bankruptcies and foreclosures are much more lenient and shorter.

First-time investors can qualify for this loan type.

Drawbacks

A DSCR loan can only be used for investment properties.

No personal income from the borrower can be used to improve ratios.

The borrower must already own a home or have a primary housing expense (renting or living rent-free is acceptable).

These loans have a lower max LTV compared to a conventional or government loan.

6-12 months reserves may be required for certain credit scores and DSCRs.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Overview

This program is for self-employed borrowers using their P&L (Profit and Loss Statement) to qualify for income. Some lenders will require a third party P&L for these loans, which means it must be prepared by someone who is not an employee of the business. This program is good for borrowers who have recently had an increase in sales and haven’t filed their tax returns yet to reflect the improved sales. 

Benefits

Allows borrowers who have had recent increases in sales to be credited for that income immediately, rather than waiting for the next tax returns to be filed. 

Primary, Second home, and investment properties are all eligible.

Drawbacks

The calculated qualifying income is still averaged over 1 or 2 years (similar to typical self-employed guidelines).

Certain lenders will require the P&L be completed by a 3rd party CPA. Hiring a CPA can be a large additional cost to the borrower if they don’t already have one.

There is a lower max LTV compared to conventional or government loans.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Overview

This program is geared toward borrowers that have qualifying income but need a “boost” from their assets to lower their DTI. This program would benefit someone with high net worth or someone with more assets than income. An Asset Depletion loan can also use outside wages or self employment to supplement income (whereas an Asset Utilization Loan does not allow the usage of additional wages).

Benefits

A borrower with a high DTI can qualify using assets in addition to their income.

Drawbacks

Non-liquid assets such as brokerage investments or retirement accounts will be discounted to account for transaction penalties and taxes, depending on the borrower’s age.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Overview

This program is geared towards borrowers with ineligible income but ample assets. To qualify, the borrower will need enough assets to cover down payment, closing costs, loan amount, and reserves for the monthly debt. Qualifying income is calculated by taking the balance of the asset listed as collateral (Checking, savings, Money markets, CDs, IRAs etc) and dividing it by the length of the loan.

Benefits

The borrower can make use of large liquid assets as well as non-liquid assets that are typically only used for reserves.

Good for borrowers whose regular income is tied up with current liabilities but still wants to purchase a home.

Great for retirees whose income is otherwise fixed.

Drawbacks

Since the assets need to cover loan payments, having sufficient assets to support an asset depletion loan is rare.

The value of non-liquid assets such as investments with brokerages and retirement accounts are discounted by up to 30-50% (depending on the age of the borrower) to account for potential downturns and disbursement fees/taxes.

This program is not as lenient as other non-QM programs in regards to FICO and recent bankruptcies or foreclosures.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Cash-out is not available.

Overview

This can be any product that requires all the same documentation (income, assets, credit report etc.) as a conventional loan, but does not follow conventional review guidelines (ex. Non Warrantable Condo products).

Benefits

These loans are great for W-2 income earners with a solid credit history who are just barely denied for a conventional loan or are denied due to features of the property that make it ineligible for Fannie Mae or Freddie Mac.

These loans collect the same documentation as a conventional or government loan but have more lenient approval guidelines, and allow some property types that do not qualify under conventional (such as non warrantable condos).

Drawbacks

Reserves may be required based on credit score, loan amount and property occupancy.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Overview

This loan is similar to full documentation loans except that only 1 year of income documentation is required as opposed to 2 years for a full documentation or conventional loan.

Benefits

This loan is good for borrowers who have had dramatic increases in income in the past few years.

Drawbacks

A 2-year history of employment or self-employment is still required.

Rental income is not considered self-employment for limited documentation review and will need to proceed with full documentation or provide 2 years of tax returns.

These loans generally have higher rates and higher FICO requirements compared to conventional.

Overview

This program is offered for borrowers without a social security number who instead are using an International Tax ID number (ITIN). A borrower with this type of tax ID generally cannot qualify for conventional and government loans. If your customer is actively applying for or obtaining a social security number, an ITIN Loan may be a good opportunity for them to secure a property and then refinance to a conventional loan later on.

Benefits

Expands coverage to borrowers who currently don’t have an SSN.

This is a good program to help out a borrower who is in the process of obtaining an SSN.

Allows some non-QM property features such as non-warrantable condos.

Drawbacks

These loans generally have higher rates and higher FICO requirements compared to conventional.