Residential Magazine

These Loans Should Take Center Stage

Nonqualified mortgages often fit when conventional financing hits a snag

By Houtan Hormozian

In the world of mortgage lending, conventional financing typically steals the spotlight. Nevertheless, an alternative has surfaced in recent times, providing a glimmer of hope for individuals who may not meet the requirements for traditional loans.

Nonqualified mortgage (non-QM) programs have gained popularity as a feasible choice for borrowers with distinct financial circumstances. Non-QM loans are quality loans that cannot be purchased by the government-sponsored enterprises or the federal government. There’s a surprising number of non-QM loan types available that can help potential borrowers who are in good financial situations but may not have a W-2 income.

These mortgages can unlock opportunities for clients to purchase a home and they offer adaptability in an ever-changing lending environment. Mortgage originators can build their business and meet their clients’ needs if they’re familiar with these products.

Decisive advantages

One of the key advantages of non-QM loans is the flexibility they offer in underwriting guidelines. Unlike traditional loans, non-QM programs take a more holistic approach to evaluating a borrower’s creditworthiness. These loans consider various factors beyond conventional metrics. This flexibility allows borrowers with nontraditional income sources or irregular employment histories to secure financing.

Non-QM lenders understand that financial profiles can be complex, so they cater to borrowers who don’t fit the rigid requirements of conventional loans. Self-employed individuals, freelancers and those with income streams that aren’t documented on a W-2 form can benefit from this flexibility. Non-QM loans consider bank statements, tax returns and other documentation that provide a more accurate representation of a borrower’s ability to repay a mortgage.

Non-QM loan programs revolutionize the lending landscape by offering expanded options that cater to a borrower’s diverse needs. These programs provide a broader range of products specifically tailored to meet the requirements of individuals who may not qualify for a traditional loan. The inherent flexibility of non-QM loans allows borrowers to explore alternative financing solutions that align with their unique circumstances.

Additionally, non-QM loans often have less stringent documentation requirements. While still adhering to responsible lending practices, these programs may accept alternative forms of income verification, making it easier for self-employed individuals or those with irregular income streams to access homeownership.

Compared to conventional mortgages, non-QM loan programs often feature a faster approval process. Non-QM lenders focus more on the borrower’s ability to repay and the collateral value rather than conforming to rigid guidelines. With less emphasis on extensive documentation and a more streamlined evaluation process, non-QM loans can be approved more quickly, enabling borrowers to secure financing promptly.

This accelerated approval timeline is especially beneficial in competitive real estate markets or when time is of the essence. Borrowers who may have missed out on a property due to a lengthy approval process with a traditional lender can turn to a non-QM loan for a quicker resolution.

Versatile options

One of the strengths of these loan programs is the versatility to offer a number of options for varying situations. A bank-statement loan, for instance, can be offered to a client who can show a set amount of income over 12 to 24 months, giving them the ability to purchase a home without having a traditional W-2 income.

Let’s say a self-employed applicant wants to purchase a home. The person owns multiple commercial properties with negative business-tax-return income and cash flow due to deferred maintenance on the properties and a lack of rental income tied to COVID-19 restrictions. But the brick-and-mortar business itself has more than sufficient revenue now to pay for the mortgage. A lender could approve a loan for this business owner by averaging their monthly deposits and factoring in a 50% expense ratio, thereby completing the financing for the purchase of a primary residence without the need for personal or business tax returns.

Another non-QM program is the asset depletion loan. If a borrower faces difficulty in qualifying for a traditional mortgage due to limited income, he or she could qualify if they have substantial assets — such as investments, savings or retirement funds. In these situations, an asset depletion mortgage program could come to their rescue. Instead of solely relying on income, the lender factors in the value of assets and their potential to generate income over time.

By incorporating both profit-and-loss statements and 1099 miscellaneous income forms, self-employed individuals or independent contractors can address the obstacle of lacking a steady monthly salary. These individuals can leverage their profit-and-loss statements to prove their financial stability and become eligible for a loan. Instead of relying solely on monthly income, the lender can consider the average annual reported income over 12 or 24 months to assess their repayment capability. This approach provides a more accurate picture of the client’s financial standing and helps them qualify for the mortgage they need.

Non-QM lenders offer a second chance for borrowers with past credit issues. While conventional loans may be out of reach for those with previous bankruptcies, foreclosures or recent credit events, non-QM lenders evaluate credit history within a broader context. They account for extenuating circumstances and the borrower’s ability to manage their finances since the negative event occurred.

This aspect of non-QM lending provides an opportunity for responsible borrowers who have rebounded from financial setbacks to obtain financing. It acknowledges the potential for financial recovery and offers a path to homeownership that would otherwise be inaccessible.

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Non-QM loan programs offer a host of advantages that empower borrowers who face unique financial situations. The flexibility in underwriting guidelines, expanded loan options, faster approval processes and second-chance opportunities often make non-QM loans valuable tools for those who don’t fit the traditional lending mold. ●


  • Houtan Hormozian

    Houtan Hormozian is a co-founder and executive at Crestico Inc. He is an experienced mortgage professional with nearly two decades of accomplishments in both wholesale and retail operations. He currently serves as the president of the California Association of Mortgage Professionals and as treasurer of its North Los Angeles Chapter. Hormozian’s expertise centers around brand development and recognition, product launch, market share, distribution, expansion and operations efficiency.

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