Non-Qualifying Mortgages: Uses & List of Non-QM Lenders

The Big Picture on Non-Qualifying or Non-QM Loans:

• • Non-QM loans provide flexible financing options for real estate investors who do not qualify for traditional mortgages.
  • Non-QM loans allow investors to secure financing for unique property types like fix-and-flips, multi-units, and vacation rentals.
  • Carefully weigh the pros and cons of non-QM loans for your situation before deciding if they align with your investment goals.

Traditional mortgage loans work great for those living a traditional lifestyle: working a job with a steady income and looking to buy a home.

However, real estate investors — and many others, such as self-employed entrepreneurs and gig workers — may sometimes find it challenging to obtain financing via traditional, qualified mortgages. 

Enter: the non-qualified mortgage (non-QM).

What Is a Non-Qualifying Mortgage?

A traditional qualified mortgage (QM) is a category of mortgage loans with features designed to make them less risky. These include stipulations like requiring borrowers to verify their income and demonstrate an ability to repay, limiting upfront points, fees, and annual percentage rate (APR), and restricting loans with terms longer than 30 years.

These rules help reduce the risk to lenders and typical mortgage borrowers, but they create extra restrictions for real estate investors looking to secure financing for investment properties.

Non-QM loans are mortgage loans that do not meet the qualified mortgage standards of the Consumer Financial Protection Bureau (CFPB). Non-QM loans provide alternative financing options for real estate investors when they may not qualify for a conventional mortgage due to unconventional income sources, a high debt-to-income ratio, or a unique property type. In general, non-QM loans allow debt-to-income ratios, or DTI, over 50%, compared to the 43% limit for qualified mortgages.

Specialized lenders willing to take on higher risks associated with unconventional borrower profiles typically offer these loans. Non-QM loans often have flexible underwriting criteria and permit alternative documentation of income and assets. This allows investors to qualify based on asset strength, property cash flow, or projected rental income rather than traditional income verification methods and the dreaded “ability-to-repay” rule.

For example, some non-QM lenders use a debt service coverage ratio to measure the property’s cash flow rather than verifying the borrower’s income. 

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Uses of Non-Qualified Mortgage Loans

According to a 2023 Consumer Financial Protection Bureau report, mortgage application denial rates rose to 9.1% in 2022 from 8.3% from the year prior. Thankfully, non-QM loans can serve real estate investors in several critical ways, depending on their situation. 

Many real estate investors must consider a non-qualified mortgage because some properties don’t meet traditional qualified mortgage lending standards. Non-QM loans enable real estate investors to secure financing for various investment property types, including fix-and-flip, multi-unit, vacation rentals, or commercial properties. 

The other primary use of non-QM loans for real estate investors is to get around conventional loans’ income documentation requirements. Because many real estate investors make the bulk of their income through their properties and other investments, they don’t always have a pay stub they can show a banker to prove their income. 

Instead, non-QM loans consider alternative income sources, proof of other assets owned, or bank statements to determine a borrower’s repayment capacity. You can also use the income you intend to generate from the property to help you qualify.

And, not for nothing, non-QM loans usually offer more leniency for borrowers with imperfect credit ratings, which means getting approval is easier. These lenders usually focus more heavily on the value of the property and the borrower’s equity rather than fixating on your credit score. Some lenders even offer non-QM loans to borrowers with past bankruptcies or foreclosures on their credit reports.

Non-QM loans resemble hard money loans, except they tend to have substantially lower interest rates—although still higher than conventional mortgages. Interest rates on non-QM loans vary from lender to lender and depend on the borrower’s down payment and credit score.

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Pros & Cons of Non-QM Loans

Real estate investors should carefully weigh the pros and cons of non-QM loans. Your financial situation, investment goals, and even the characteristics of the specific property in question can influence whether non-QM loans align with your needs and risk tolerance. Consult with a mortgage professional or financial advisor to review your situation, but generally, non-QM loans carry these pros and cons.

Pros of Non-Qualified Mortgage Loans

• • Financing for Unique Property Types: Non-QM loans enable real estate investors to finance or refinance types of properties that may not meet traditional lending standards. This includes fix-and-flip houses, one or multi-unit properties, vacation rentals, or commercial properties that qualified mortgage loans might not allow.
  • Flexible Income/Asset Verification: Non-QM loans offer real estate investors the ability to qualify based on bank statements, asset-based income verification, property cash flow, or projected rental income rather than relying solely on conventional income verification methods. This makes them more accommodating to self-employed borrowers or investors with non-traditional income sources.
  • Flexible Underwriting: Non-QM lenders focus more on a borrower’s equity and the overall strength of their investment property than their credit history. Borrowers with bad credit history (even credit events like bankruptcy or foreclosure) or lower credit scores will qualify for a non-QM loan more easily than a traditional loan.

Cons of Non-Qualified Mortgages Loans

• • More Expensive: Because they carry an increased risk to lenders, non-QM loans typically carry higher interest rates and fees than conventional mortgage loans – ranging from 8-12% plus 1-2 points. You may need a larger down payment, too. Non-QM loans often come with shorter loan terms, which equates to higher monthly mortgage payments.
  • Stricter Qualification Requirements: Although non-QM loans provide more flexibility than traditional loans, they also often require meeting higher qualification requirements. Borrowers may need more documentation and meet stricter criteria related to their income and assets than they would when applying for a comparably qualified mortgage.
  • Limited Availability: The big, household-name banks don’t offer non-QM loans. You’ll need to find a specialized lender that deals in non-QM loans. Suitable lenders and loans may not be as readily available in your area or situation—expect to do more extensive research and end up with fewer choices.

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• Finding a Non-QM Lender

  When considering non-qualifying mortgage loans, research multiple lenders to compare their loan products, rates, and terms. The availability and terms of non-QM loans vary based on factors such as geographic location, borrower qualifications, and market conditions. When in doubt, consult a mortgage professional to determine the best fit for your needs and circumstances.

  The investment property lenders listed below offer non-QM loan products and have established a strong reputation in the mortgage industry. Of course, the mortgage market is highly competitive and subject to change, and your mileage may vary based on your needs and financial situation. Consider this a starting point for your research rather than a definitive “best of” list.

  • Forman Loans: Work directly with Jason Forman, who will compare shop portfolio lenders to find the lowest possible interest rate.
  • Visio Lending: Visio offers flexible financing for real estate investors. We’ve known them as a reliable lender for many years now.
  • Kiavi: After rebranding from LendingHome to Kiavi a few years ago, Kiavi remains an excellent lender for all investment property loans.
  • New Silver: Another easy-to-work-with rental property lender, New Silver earns top marks from borrowers.
  • Angel Oak Mortgage Solutions: With over ten years of experience, Angel Oak Mortgage Solutions has established itself as a trusted and reliable source in the industry. Angel Oak Mortgage Solutions offers a range of non-QM products for self-employed individuals, private real estate investors, high-net-worth individuals, foreign nationals, and more. Angel Oak offers non-QM loans designed specifically for real estate investors, including fix-and-flip loans, rental property loans, and bank statement loans for self-employed borrowers.
  • Fairway Independent Mortgage Corp.: Fairway offers a wide variety of qualified and non-qualified mortgage options. This highly-rated lender closes billions of dollars worth of non-QM loans each year and has served borrowers for over a quarter century.
  • Change Lending: Change Lending offers traditional and non-traditional mortgages to a diverse range of borrowers. It offers a line of investor loans, including non-QM loans, that give prime borrowers alternative ways to qualify. Its Investor Program offers flexible qualifying options, including using your property’s rental income cash flow and competitive interest rates.
  • Citadel Servicing Corporation: Citadel Servicing offers non-QM lending, specializing in loans for real estate investors with unique financial situations or unconventional property types. The company specializes in alternative income loan products, such as bank statements, asset depletion, and verification of employment programs.
  • Caliber Home Loans (NewRez LLC): Caliber Home Loans offers non-QM loan programs like asset depletion loans to help real estate investors leverage their assets to qualify for financing. Its Smart Series offers several flavors of non-QM loans, including jumbo loans, SmartSelf loans for self-employed borrowers, and a SmartVest option for experienced real estate investors with complex finances.
  • Guaranteed Rate: This large traditional and non-traditional lender offers non-QM loans but is a little light on details on its website. You’ll need to contact a loan officer to discuss your specific situation. It does offer interest-only mortgages and jumbo loans that may appeal to real estate investors.
  • Athas Capital Group: Athas Capital Group focuses on providing non-qualified mortgage loans to investors with imperfect credit histories or non-traditional income sources.
  • Deephaven Mortgage: Deephaven Mortgage is a non-QM lender specializing in alternative lending solutions for real estate investors, including those with non-standard income or credit profiles.
  • LoanStream Mortgage: LoanStream Mortgage provides non-QM loan products designed to meet the needs of self-employed borrowers and real estate investors with unique financial situations.
  • HomeXpress Mortgage: HomeXpress Mortgage offers non-QM loans for real estate investors, including fix-and-flip loans, foreign national loans, and bank statement programs.
  • Finance of America Mortgage: Finance of America Mortgage provides non-QM loan solutions for real estate investors, such as asset-based loans and interest-only programs.

• FAQs

• What does non-mortgage mean?

  Non-mortgage loans are loans not tied to real estate but used for other purposes like cars, education, debt consolidation, or personal expenses.

• What is considered a qualified mortgage?

  A qualified mortgage is a loan category with less risky features that lenders must reasonably determine borrowers can repay.

• What is a non-delegated mortgage?

  A non-delegated mortgage is when the lender has the mortgage insurer perform the risk assessment and decision instead of doing it themselves.

• What is a non-regulated mortgage?

  An unregulated mortgage falls outside the protection of the Financial Conduct Authority (FCA), meaning you have fewer protections if something goes wrong.

• What is a non-fixed mortgage called?

  Non-fixed mortgages are called adjustable-rate mortgages (ARMs). Their interest rates can change over time based on market trends, unlike fixed-rate mortgages, which stay the same.

• Final Thoughts

  Non-qualified mortgage loans offer real estate investors a viable alternative to traditional mortgage financing. These loans cater to investors with unique financial profiles, enabling them to finance investment properties that may not meet the criteria for conventional, qualified mortgage loans.

  Investors can unlock greater opportunities in the real estate market by considering the pros and cons and researching the options from reputable non-QM lenders. However, be prepared to conduct thorough research, carefully assess the terms and conditions of non-QM loan offers, and seek professional advice to make informed financing decisions.♦ 

  What has kept you from using non-QM lenders in the past? What questions do you still have about non-QM loans?