When you apply for a mortgage, one of the most common eligibility criteria is DTI: debt-to-income ratio. The criteria is set to ensure you don’t commit to more in debt payments each month than you have to spend on them.
The challenge with landing a mortgage for self-employed borrowers? To determine your DTI, banks usually need to verify your income. That can be tricky if you work for yourself, earn money through freelance or gig work, or have other hard-to-document forms of income. But that shouldn’t bar you from home ownership.
To get a mortgage when your income is difficult to document, look into a non-QM loan.
What Is a Non-QM Loan?
A non-QM loan is a non-qualified mortgage, which is a home loan that uses alternative eligibility criteria to verify a borrower can repay the loan. That makes it a type of loan that’s easier for borrowers with non-traditional income or financial circumstances to qualify for without being put at severe risk of defaulting, as was the case during the 2008 financial crisis before stricter government regulations were placed on lending.
The term “non-qualified mortgage” is in contrast to a “qualified mortgage,” which is a home loan that meets the requirements enforced by the Consumer Financial Protection Bureau (CFPB), one of the federal agencies that regulates consumer financial products like loans and credit cards.
In addition to restrictions on the structure of home loans — like limiting fees and interest-only payments — a qualified mortgage comes with standards for verifying a borrower’s ability to repay. That generally includes a credit check, documentation of employment history, and verifying income with documents including tax returns, pay stubs and W-2 forms.
Non-qualified mortgages don’t have to adhere to all these standards. Lenders can use their own set of alternative guidelines to determine whether a borrower can repay the loan. Non-QM loans may also be structured with riskier features, but those are rare, and the options are significantly limited since the passage of Dodd-Frank in 2010.
It might sound a little tricky, but non-QM loans have some built-in safety nets. Lenders are still required by regulation to have guidelines for determining a borrower’s ability to repay. And lenders have some incentive to restrict lending to borrowers who are able to make payments.
Non-QM loans do pose a higher risk for lenders, because their verification methods are less tested than those required for qualified mortgages. But lenders balance that risk by increasing other standards, including a higher minimum credit score and higher interest rate and down payment than most qualified mortgages.
Non-QM loans exist, because unique financial circumstances exist, and CFPB regulations can’t account for every lifestyle.
This type of loan can help non-traditional borrowers, especially those who are self-employed, gig workers or small business owners, borrowers without a Social Security number, immigrants and those with a recent bankruptcy.
Who Can Get a Non-QM Loan?
If you’re ineligible for a qualified mortgage with traditional lenders because you can’t provide the required income verification documents or have other extenuating circumstances, a non-QM loan may give you access to homeownership you might not otherwise have.
Non-QM loans typically require a high credit score — an average of around 700 — and down payment of around 25%, a little higher than a typical mortgage (without private mortgage insurance) and much higher than the 3.5% required for federally backed FHA mortgages.
You’re not necessarily disqualified if you can’t meet these requirements. Speak with one of our mortgage specialist to learn more about your options.
Where to Get a Non-QM Home Loan
Not all lenders offer non-QM loans, so you have to find an institution dedicated to making lending accessible to non-traditional borrowers.
As one of only 3% of banks in the country designated by the US Treasury as a Community Development Financial Institution (CDFI), Quontic is able to provide non-traditional borrowers access to homeownership through unique mortgage solutions.
We know many qualified borrowers are overlooked by traditional lenders because of unique circumstances like self-employment or freelance income, even though you may have significant resources and a solid credit history. Our Community Development Loans1 are designed for these borrowers. You can use a Community Development Loan to purchase a home or refinance an existing mortgage.
If a non-QM loan sounds like the right option for your financial situation, explore our Community Development Loan program. You can also speak to one of our mortgage specialists to learn more and even get pre-qualified for a loan online today.
This is not financial advice, nor should it constitute or be construed as instruction for any individual reader, or group of readers, to act or make a decision in any financial capacity. Seeking independent, professional consultation from a qualified and licensed expert is always the optimum avenue in making financial decisions.
1All lending products are subject to approval. Rates, program terms & conditions are subject to change without notice. Not all products are available in all states or for all amounts. This does not represent an offer to enter into a loan agreement. Other requirements, restrictions & limitations apply. Information is accurate as of January 24, 2022 & is subject to change without notice.