When you’re looking to secure a mortgage to buy a home, there are many different routes to take.
While some people opt for a traditional loan, others find that it is not ideal for one reason or another.
If you’re finding yourself in this situation, the team at Raleigh Mortgage Group is here to help. We can advise on a variety of loan options, including Non-QM loans.
What Does A Non-QM Loan Stand For?
Non-QM stands for non-qualified mortgage. These loans are geared toward people who have financial profiles that don’t meet the requirements of a typical qualified mortgage. People may be financially ready for a mortgage, but don’t have the necessary paperwork to provide to the bank to show that they are capable of making monthly payments.
Why Are Non-QM Loans So Popular Right Now?
Despite the terms that non-qualified mortgage loans can bring, they are popular because they offer the flexibility that borrowers who don’t fit the conventional criteria need. With the rise in self-employment and more people taking side jobs, the need for Non-QM loans is growing.
For example, people who are self-employed often show less taxable income due to business expenses and deductions. This can make it difficult to qualify for a traditional mortgage. When applying for a non-QM loan, bank deposits and cash flow can be looked at rather than taxable income. This can provide a path to home ownership that they may have not otherwise had.
Non-QM Loans and Investment Properties
Non-QM loans can benefit real estate investors who may have trouble qualifying for a traditional mortgage. The flexible financing options make owning an investment property within reach. By utilizing the property’s rental income and bank statements versus W-2s or tax returns, real estate investors can obtain a loan.
This is ideal for any real estate investors who fall under these categories:
- Self-employed
- Own multiple properties
- Have significant assets but less documented income
Non-QM loans may allow for higher debt-to-income ratios or even no ratio loans for individuals looking to finance their investment property opportunities. If you’re a real estate investor who falls under one of these categories, let us show you how the team at Raleigh Mortgage Group can help.
Non-QM Loans and Understanding DSCR
(Debt Service Credit Ratios)
The debt service credit ratio can be beneficial for real estate investors looking to obtain a Non-QM loan. It determines eligibility based on the property’s net operating income and its total debt service.
To obtain the debt service credit ratio, the property’s net operating income (the total annual rental income after subtracting all operating expenses, but before making debt payments) is divided by its total debt service (annual mortgage payments including taxes, interest, and insurance).
- If the ratio is greater than 1.0, the property’s income is enough to cover its debt. A ratio of 1.25 or higher is especially strong and preferred by lenders.
- A ratio of 1.0 is just enough to cover its debt.
- Any ratio less than 1.0 is not enought. This presents a higher risk and can put your loan in jeopardy.
This online calculator tool can help determine your debt service credit ratio. At Raleigh Mortgage Group, we can help you navigate through this process to better understand the DSCR and how it can impact you as an investor looking for a loan.
Non-QM Loans and Bank Statements
Bank statements can be utilized in the process of qualifying for a non-QM loan because they show lenders your bank account activity to determine your cash flow and ability to repay a loan.
The lender will look at 12-24 months of personal or business bank statements. The total monthly deposits will be averaged to determine a gross income. Expenses will also be looked considered. Once these comparisons are made, a lender can have a better idea if someone is able to repay a loan.
If there is enough cash flow to show repayment is feasible, some borrowers may also qualify for a larger loan than they would if they went the traditional route.
When To Choose a Non-QM Loan?
There are several scenarios when choosing a Non-QM loan makes sense. These include:
- Variable income
- Visa status
- Self-employment
- Past credit issues
- Investment property financing
People who fall into these categories will typically need to provide bank statements, profit and loss statements, or asset depletions to verify income.
FAQs
Since Non-QM loans offer borrowers more flexibility than traditional mortgages, they are more accessible to those with lower credit scores. Most lenders look for a credit score of at least 620 for a Non-QM loan.
Non-QM loans offer a more flexible application process. Qualifying loans, such as an FHA loan, are backed by the government and considered less risky.
It is possible to refinance out of a Non-QM loan. If you find yourself securing a Non-QM loan due to bankruptcy or foreclosure, you could refinance into a qualified mortgage once those past problems are no longer issues. But many borrowers who don’t fit the traditional mold find that Non-QM loans are the best fit for their financial situation.
Non-QM loans can come with higher interest rates and higher closing costs compared to traditional loans. People who take out a Non-QM loan may need to make a larger down payment or pay a higher interest rate. They may also be subject to longer loan terms as well as a balloon payment.
Do You Want More Information on Non-QM Loans?
Non-QM loans provide a pathway to homeownership for borrowers who don’t fit the mold of a traditional mortgage, but it’s crucial to understand the associated costs and risks. Talk with the mortgage professional at Raleigh Mortgage Group when pursuing a non-QM option. We’re ready to help. Call us today at 919-866-0212, or fill out the form below to get started.