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Nonqualified Mortgage

Nonqualified Mortgage

What Is A Nonqualified Mortgage?

Unlike a qualified mortgage, a nonqualified mortgage (non-QM loan) doesn’t conform to the consumer protection provisions of the CFPB. Applicants who have an income that varies or who face other unique circumstances, such as being a freelancer or side-gig worker, may qualify for this type of mortgage.

Who Can Benefit From A Nonqualified Mortgage?

Most borrowers end up with a qualified mortgage. However, a nonqualified mortgage is an easier option in some circumstances. This may be the case for the following types of borrowers:

  • The self-employed
  • Business owners
  • Those with higher levels of debt
  • Real estate investors
  • Freelance or gig-economy workers with a varying income
  • Foreign nationals

Nonqualified mortgages allow these borrowers to get into a home more easily than they could with a qualified mortgage. The disadvantages include the need for a higher down payment, credit score, and certain reserves.


VOE (Written Verification of Employment) or P&L Statement Program:

This mortgage program is tailored to accommodate both traditionally employed and self-employed borrowers who may not have the conventional forms of income documentation like W-2s, pay stubs, or tax returns. It provides an alternative way to verify income and employment history through either a Written Verification of Employment (VOE) or Profit & Loss (P&L) statements.

Program Features:

  1. Income Verification Options:
    • Written Verification of Employment (VOE):
      • Employment History: Instead of using W-2s, pay stubs, or tax returns, borrowers can provide two years of employment history verified directly by the employer. This written VOE confirms the borrower’s employment status and income level over the specified period.
    • Profit & Loss (P&L) Statement for Self-Employed Borrowers:
      • Business Income: Self-employed borrowers can qualify by submitting a Profit & Loss statement covering the last two years. This document should detail the borrower’s income and expenses, offering an alternative way to verify income without traditional tax documents.
      • Additional Documentation: It’s common for lenders to request a business license or a letter from a Certified Public Accountant (CPA) to verify the legitimacy of the business and the accuracy of the P&L statement.
  2. Loan-to-Value Ratio (LTV):
    • LTV up to 80%: Borrowers can finance up to 80% of the property’s value under this program. This applies to primary residences, second homes, and investment properties.
  3. Credit Score Requirements:
    • Minimum FICO Score: A minimum FICO credit score of 660 is required to qualify for this program. Borrowers with higher credit scores may benefit from more favorable loan terms.
  4. Down Payment, Closing Costs, and Reserves:
    • Gift Funds Allowed: Borrowers can use gift funds to cover the down payment, closing costs, and reserves. Proper documentation must be provided to show the source of these funds, typically in the form of a gift letter.
  5. Loan Types:
    • Refinance and Purchase: This program is available for both refinancing an existing mortgage and purchasing a new property. It is designed to offer flexibility to borrowers in different financial situations.



DSCR (Debt Service Coverage Ratio):

  • Income Verification:
    • No Traditional Income Verification Required: Unlike conventional loans that require proof of personal income through tax returns, pay stubs, or other documentation, DSCR loans focus on the property’s ability to generate sufficient rental income to cover the mortgage payments.
  • Credit Score Requirements:
    • Minimum FICO Score: To qualify for a DSCR loan, borrowers typically need a minimum credit score of 660. A higher credit score can potentially lead to better loan terms.
  • Loan-to-Value Ratio (LTV):
    • LTV up to 80%: Investors can finance up to 80% of the property’s value, meaning a down payment of at least 20% is required. The higher the LTV, the more risk the lender assumes, which can affect the interest rate offered.
  • Asset Verification:
    • Verification of Assets: Borrowers must provide documentation to verify assets, including the down payment, closing costs, and reserve requirements. These reserves typically cover several months’ worth of mortgage payments to ensure the borrower can maintain the property even during periods of vacancy.
  • Use of Gift Funds as Down Payment:
    • Gift Funds Accepted: Borrowers are allowed to use gift funds to cover part or all of the down payment, closing costs, or reserves. However, proper documentation is required to verify the source and nature of the gift.
  • DSCR Calculation: The DSCR is calculated by dividing the property’s net operating income (NOI) by the mortgage payment. A DSCR of 1.0 means that the property’s income exactly covers the mortgage payment, while a DSCR above 1.0 indicates that the property generates more income than needed to cover the mortgage, which is favorable for lenders. Example: if a property generates $5,000 in monthly rental income and the monthly mortgage payment is $4,000, the DSCR would be 1.25 ($5,000 ÷ $4,000). A DSCR of 1.25 shows that the property generates 25% more income than required to cover the mortgage payment, indicating a lower risk for the lender.


Bank Statement Mortgage Program Overview

The Bank Statement Mortgage Program is designed for self-employed borrowers or those with complex income streams who may not have traditional income documentation, such as tax returns, W-2s, or pay stubs. Instead, this program allows borrowers to qualify based on the deposits shown in their personal or business bank statements.

Key Features:

  1. Income Verification Through Bank Statements:
  2. Bank Statement Options: Borrowers can qualify using deposits shown on bank statements from the last 2 to 12 months. This flexibility allows lenders to assess income based on actual cash flow rather than reported income on tax returns.
  3. Loan-to-Value Ratio (LTV):
  4. Up to 80% LTV: Borrowers can finance up to 80% of the property’s value. This applies to primary residences, secondary homes, and investment properties, making it a versatile option for various types of real estate transactions.
  5. Credit Score Requirements:
  6. Minimum FICO Score: A minimum credit score of 660 is required to qualify for the program. This ensures that borrowers have a solid credit history, even if their income documentation is unconventional.
  7. Eligible Property Types:
  8. Primary, Secondary, and Investment Properties: This program is available for various types of properties, offering flexibility for different purchasing or refinancing needs.
  9. Use of Gift Funds:
  10. Gift Funds: Borrowers can use gift funds to cover the down payment, closing costs, and reserves, provided that the source of these funds is properly documented.
  11. Loan Types:
  12. Refinance and Purchase: Whether you're looking to purchase a new property or refinance an existing mortgage, this program offers options for both scenarios.


Asset-Based Loan (or Asset Depletion Loan)

This type of loan allows borrowers to qualify based on their assets rather than traditional income verification methods. Here's how it typically works:

  • Qualification Based on Assets: Instead of looking at your income, the lender calculates how much you can borrow by analyzing your liquid assets, such as savings, investments, or retirement accounts.
  • Primary home LTV up to 65%
  • Investment property LTV up to 60%
  • Minimum FICO Score: 660
  • No Prepayment Penalty
  • The lender requires the borrower to have at least 12 months of reserves available.
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