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Non-QM loans, in short, are loans that do not fit conforming guidelines. This can be due to the following:
FICO Too Low
Loan Amount above Lending Limits
Income Documentation not Available
Etc.
NOTE: Regardless of LTV, Non-QM loans will never require mortgage insurance.
Full Document Loans
Full Document loans mean the same requirements as confirming loans. i.e. W2's, tax Returns, Paystubs, Etc.
The nuance here, is that you can do a Full Document Non-QM loan with only 1 Year worth of those documents.
You can also qualify the borrower with 2 Years worth of documentation. The borrower might simply fall into the Non-QM category because of the loan amount they are seeking.
Bank Statement Loans
Bank Statement loans are geared specifically to business owners/self-employed individuals. So, instead of using W2's, tax Returns, etc. we can qualify a self-employed person, who has been so for at least 24 months, using their bank statements. This program is suitable in the event their tax returns do not accurately support the income they are generating.
We would collect 12 or 24 months worth of bank statements and do an analysis of the statements.
Once the analysis is done, that figure is what is used for the borrowers monthly income.
1099 Only
This would be permitted for those consumers who are independent contractors and are paid 1099.
You have the option to do 1- or 2-years' worth of 1099.
The qualifying income would be 90% of the latest 1-year 1099, or 90% of the averaged amount over the last 2 years.
They would need to show they have been independent contractors for at least 2 years! Regardless of how you qualify the income.
DSCR
DSCR (Debt Service Coverage Ratio) is a Non-QM loan specifically for investment properties.
This program requires NO income documentation from the borrower. The "income" comes from the rental income from the property, and it is compared against the expenses the property will incur.
Below is an example:
Rental Income = $2,500.00
PITIA (from the new mortgage) = $2,000.00
The DSCR = Rental Income / PITIA => $2,500.00 / $2,000.00 = 1.25
If the number is higher than 1.00 it means that the property is making money each month. It is CASH FLOW POSITIVE.
If the number is less than 1.00 it means that the property is losing money each month. It is CASH FLOW NEGATIVE.
We can do loans at either end of the spectrum. The DSCR will simply dictate the LTV and the Rate we offer to the borrower.
With DSCR loans, you can also Cross-Collateralize properties. This is also known as a blanket loan. For these loans, you can pool different properties together, into one transaction, and get favorable rates, as opposed to doing each transaction individually.
The subject property minimum is currently 3, with a 25 property maximum.
To do a cross-collateralized loan, all of the properties must be 1-4 units. You cannot include 5-8 unit properties.
You can have purchase and refinance transactions within one blanket. It is a good way to avoid multiple closing costs as well.
Asset Utilization Loan
Asset Utilization may be used as the sole source of income for loan qualification or to supplement other income sources. When used to supplement other income sources, the minimum asset requirements under qualification method are waived.
This is an easy way to calculate income, should you run into a high net-worth client.
The rule of thumb is that the asset (checking, savings, retirement, stocks, bonds, etc.) is either greater than $1,000,000 or 150% of the loan amount. Keep in mind, the amount of the asset eligible for use depends on the investor. i.e. 100% of a checking account can be used, but only 60% of a retirement account.
To calculate the amount used for income, you would take the asset and subtract the following:
Down Payment
Closing Costs
Reserves
The result of that, you would then divide it by 84. That would be your monthly income.
Below is an example:
Purchase Price $625,000.00
Loan Amount $500,000.00
Assets
Checking Account $2,125,000.00
Retirement Account: $100,000.00
Assets Eligible for Use = $2,125,000 + ($100,000 * 60%) = $2,185,000.00
Subtract $125,000 for down payment, $25,000.00 for closing costs and $24,000.00 for reserves.
Subtotal is $2,011,000
Qualifying monthly income is $2,011,000.00 / 84 = $23,940.48
In the conforming world, there are tests that must be adhered to, to ensure compliance. One of the biggest test, is the Points and Fees test.
Essentially, this test ensures that a lender does not charge more than 3% of the loan amount in fees. This encompasses all fees payable to the lender.
In the Non-QM world, the test still exists, but the rule of thumb is that it is increased to 5% of the loan amount.
There are some exceptions to the rule above as well - more so as it pertains to DSCR loans. In some instances, they can go up to 7%, or have no cap at all.
Each investors will have their own points & fees cap.
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