A Non-QM loan, or a non-qualified mortgage, is a type of mortgage loan that allows you to qualify based on alternative methods, instead of the traditional income verification required for most loans. Common examples include bank statements or using your assets as income. Because of the more flexible qualification requirements, Non-QM loans open up real estate investment opportunities to a broader group of individuals.
Debt Service Coverage Ratio (DSCR)
This is the perfect loan for a real estate investor. The main feature of this loan is that personal income, including other properties, is not necessary to qualify. The qualifying income factor is the market rents. Qualification is based on the percentage of the rents compared to the obligation on the property, current (refi) or proposed (purchase), to create a ratio. The higher the DSCR ratio, the better, and will result in improved interest rates and Loan to Value limits. The standard ratio is 1 - 1 where rents are equal to or higher than the PITI (principal, interest, taxes and insurance). The good news for investors is that this program also allows for a negative ratio as low as .75, in other words, the market rents can equal 75% of the housing obligation, however, expect adjustments to LTV limits and interest rates.
Assets for Income
Assets for Income (aka: asset depletion) is a loan program that allows the borrower to use their assets as a monthly income for qualification. The qualified assets are divided by the term of the loan to calculate a monthly income. The borrower never actually spends the assets, instead the lender assumes they could if they ran out of money. This is the basic theory behind this type of alternative income loan. But, it's not limited to just Non-QM loans; Fannie Mae has this too, however, the Non-QM version divides the qualified assets by terms as short as 3 years (36 months) which calculates to a much higher monthly qualifying income. Fannie Mae uses 360 months (30 years) for their calculation. As such, the assets for income loan has advantages for borrowers with low income but high assets for the Non-QM or Fannie Mae products.
Bank Statement - for Self Employed
The Bank Statement loan essentially replaced the "stated income" loan. Stated income allowed a borrower to "state" a reasonable income based on their line of work. The philosophy was that self employed borrowers had sufficient gross income to qualify but not net income due to write-offs on their tax returns. This is the similarity with the Bank Statement loan; gross deposits are used to establish a steady income for a self employed person over a 12 or 24 month period. The type of industry (service or product) and number of employs will determine a percentage haircut to the gross income, similar to an expense ratio. Once the haircut is applied, a final monthly income is calculated for qualifying. Two years of self employed is recommended but the borrower will qualify if they have 1 year self employed and 1 year as w-2 in the same line of work. Otherwise, 18 months is the minimum as self employed.
1099 loan - for Self Employed
Similar to the Bank Statement loan, a 1099 loan allows a self employed borrower to use 1099's to prove gross income. A haircut (expense ratio) is applied to the gross income based on the type of the business and number of employees to calculate a final usable income. This program allows 12 or 24 month's of 1099's for income calculations. Two years of self employed is recommended but the borrower will qualify if they have 1 year self employed and 1 year as w-2 in the same line of work. Otherwise, 18 months is the minimum as self employed.
Profit and Loss loan - for Self Employed
The P&L loan is one of the newest variations of alternative income loans and one of the easiest to close. Proof of the existence of the business is required for a minimum of 2 years with appropriate licensing. The most updated version of this loan allows both audited and unaudited P&L's (CPA or borrower signed). This new update allows many more people to qualify but it also has some of the most challenging terms. The rates will be higher and the LTV's lower than a Bank Statement, 1099 or DSCR loan. Two years of self employed is recommended but the borrower will qualify if they have 1 year self employed and 1 year as w-2 in the same line of work. Otherwise, 18 months is the minimum as self employed.