Residential Magazine

Get Your Client in the Front Door

Non-QM products may be the best option for a generation of self-employed workers

By Steven Winokur

Beginning in 2020, many people chose to become self-employed. In a short period of time, this trend had a name: the Great Resignation. This past summer, as much as 40% of the U.S. workforce was reportedly considering quitting their jobs. As a result, a new set of home shoppers is entering the market and finding it hard to qualify for a traditional home loan due to a range of factors.

The number of self-employed and gig-economy workers in the U.S. has reached 57 million and counting. While this is generally good for an economy and tends to offer a certain amount of resilience in a downturn, it’s interesting to look at how this prospective buyer pool interacts with the housing market.

Even potential buyers who are both well qualified and low credit risks often can’t get past the front door.

Additionally, consider the state of the housing market. Potential buyers in general are finding it increasingly difficult to qualify for a home loan in the current environment. Rising interest rates, coupled with high home prices, are drastically impacting affordability. Add in a new pool of clients who recently became self-employed and require in-depth analysis of tax returns, among other income-related documents, and you have a unique problem.
Even potential buyers who are both well qualified and low credit risks often can’t get past the front door. In this environment, it can be easy for self-employed home seekers to feel discouraged, choose to pull back and sit on the sideline. They may be completely unaware that they are able to purchase now. How can they get in the know? For mortgage originators and their clients, it’s largely about who you know.

Pivotal factor

There are few relationships more important to a homebuyer than those they create with their Realtor and mortgage originator. Realtors play an important role in getting their clients to closing, not only by serving as advisers but by cultivating relationships with originators. These relationships open a wealth of knowledge about which products are available for creative financing solutions, and they are integral to navigating changing market conditions and buyer profiles.
Partnering with the right team that acknowledges and understands the challenges and opportunities of their clients can be the pivotal factor for a smooth closing or simply qualifying at all. Moreover, it’s a game changer to have a team that knows which products are available and has access to the right programs for a specific borrower.
There is no one-size-fits-all approach when it comes to finding the right mortgage program. Every borrower is different and so is their financial situation. When qualifying for a traditional mortgage proves challenging, the nonqualified mortgage (non-QM) sector can offer relief. Non-QM loans are typically quality loans that fall short of the standards required for purchase and securitization by the government-sponsored enterprises Freddie Mac and Fannie Mae.
Non-QM lenders provide innovative and creative mortgage programs to help qualify a changing borrower pool and get creditworthy clients to closing. And there are many options for originators and their clients to choose.

Alternative financing

One non-QM option that’s useful for self-employed borrowers is the bank-statement loan. Self-employed borrowers represent an underserved segment in the mortgage industry. Bank-statement loans can be the perfect option for a borrower who needs an alternative method to show the true cash flow of their business.
These programs typically review 12 to 24 months of bank statements, using the cash flow of the business as an income calculation to determine the ability to repay. There also are options for 1099 workers — such as freelancers, independent contractors and other self-employed workers.
Another option for real estate investors is a debt-service-coverage ratio (DSCR) loan. Investors looking to purchase a property need to provide two years of tax returns to qualify for an agency loan. Interpreting these returns with multiple properties and reserves for each one, however, can be a challenge.
To simplify the process, clients qualify for a DSCR loan based on a rental analysis to determine the property’s cash flow. No personal income is required to qualify. This allows borrowers to avoid submitting complicated income statements and tax returns.
Instead of a traditional income calculation to determine the ability to repay a mortgage, these programs utilize a debt-service-coverage ratio, which measures a property’s income against its debt. These programs often allow for non-warrantable condominiums and borrowers can place the title in a limited liability company. Plus, there is often no limit on the total number of properties an investor can own.
Asset-qualifier loans assist those who may not have income but do have sizable assets. Borrowers qualify using their liquid assets. There is no requirement for employment, income or a debt-to-income ratio to justify the ability to repay. Buyers qualify based on required assets that meet seasoning requirements. This program is great for retirees, underserved self-employed individuals, those who are divorced and have no income, and other borrowers with seasoned assets who wish to purchase or refinance.
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Through these options and more, non-QM programs offer opportunities to purchase or refinance a home to a well-qualified but often overlooked sector of potential borrowers. If you find yourself with a challenging scenario that does not meet agency requirements, consider exploring non-QM programs that could make sense for you and your client. ●


  • Steven Winokur

    Steven Winokur is the chief marketing officer for Angel Oak Companies, overseeing all marketing and branding initiatives. Winokur has more than 25 years of experience in both corporate and agency environments. Prior to Angel Oak, he oversaw marketing and branding for Buyers Protection Group and United Guaranty, as well as two advertising agencies. Winokur lives in Atlanta with his wife and two kids. 

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