Non-Qualified Loan

Documents Required for a Home Loan

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If you are self-employed, work on commission, or otherwise have irregular income, you might think it’s impossible to get a mortgage with full documentation. If you can’t prove regular income, a lender won’t want to give you a loan, right?

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Luckily, there are ways around it. While you may not be able to get conventional financing, you may be able to get a home loan with limited documentation.

Just what does this mean? Keep reading to find out more.

Verifying Your Income

The largest piece of the puzzle when applying for a mortgage is typically your income. It makes sense; lenders need to know that you can pay the loan back in full. They don’t want to give a loan to someone that might have trouble making the payments.

But what happens if you have irregular income or you can’t verify your self-employment income with your tax returns because of the write-offs that you take? You can use limited documentation. While this doesn’t mean ‘no documentation,’ it just means that you verify your income in some other way.

The traditional way to verify income is with your pay stubs, W-2s, and/or tax returns. If you know these documents won’t help you look like a ‘stable borrower,’ you may be able to verify your income with your bank statements instead. Lenders are able to accept bank statements for borrowers that regularly deposit their income in one bank account and that can provide proof that it’s their income.

Just why would bank statements be better than tax returns? It’s for one good reason – deductions. As a self-employed borrower or even borrower that works on commission, you have the right to take many deductions on your taxes. Unfortunately, mortgage lenders must use your adjusted gross income according to your tax returns. If you take so many write-offs that you make your AGI zero or negative, it would be impossible to qualify for a loan.

When you can use your bank statements, you can show lenders the amount of money you actually bring in because it’s deposited in your bank account. As long as lenders can tell that it’s your income and not money from any other source, they can use it.

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Verifying Compensating Factors

Accepting limited documentation is a big risk for lenders. In order for them to allow it, they need to see other compensating factors or factors that make your loan less risky. These include:

  • High credit score – show lenders that you are a good risk by having a high credit score. Lenders want to know that you pay your bills on time and don’t overextend your credit. A high credit score will give them this reassurance.
  • Low debt ratio – Lenders want to know that your monthly income isn’t spread thin. They want you to have disposable income in order to cover the cost of living. They also want to know that you aren’t in over your head in debt.
  • Assets – If you have money in savings or even in liquid investments, they can count as reserves. This is money the lender counts as what you could use to make your mortgage payment should your income decrease or stop. The more money you have available in reserves, the better your chances of approval become.

Finding a Lender

The hardest part of getting a limited documentation loan is finding an appropriate lender. You won’t get a conventional or even government-backed loan with limited documentation. Instead, you’ll need to use an alternative or subprime lender.

Don’t let the name scare you – they are literally just lenders that write their own programs and keep the loans on their own books. In other words, they don’t have to answer to any other investors. They can make their own rules, which may or may not include the ability to accept limited documentation.

You should shop around with at least three lenders to see what they have to offer. Since this is a portfolio loan program, you may find the terms and costs of the loan very different between lenders.

Getting a home loan with limited documentation is possible, you just have to be diligent in your efforts. Make sure to set up your qualifying factors as well as you can before you apply so that lenders see you as a good risk right from the start.

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3 Things the Self-Employed Need to do in Order to Refinance

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The dreaded debt ratio holds many borrowers back from obtaining a mortgage, especially those that are self-employed. Because your income is not as straightforward as someone with a consistent salary and W-2 to prove it, you have to be more creative with your monthly debts in order to get your debt ratio down. The typical maximum for a Qualified Mortgage is 43 percent, but you have to have other factors that fall into line, such as predictable income in order to qualify under those guidelines. Lenders that are willing to offer alternative documentation loans, such as bank statement loans, are able to be a little more flexible with the debt ratio, but they still want it as low as possible. Here are a few simple ways to ensure your DTI is not out of control in order for you to get approved for a more unique loan program.

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Refinance your Debts

You can have outstanding debt and still get a mortgage. What lenders care about most is the monthly payments you must make. If your current payments take up a large portion of your monthly income as they figure it based on your last 12 to 24 months’ worth of bank statements, then you may have a harder time qualifying. If this is the case, try refinancing those debts. A few examples include:

  • Student Loans – If you have numerous student loans that were previously deferred or that you are still paying on despite having them for many years, they can really take up a large portion of your monthly income. Rather than paying several loans per month, try to refinance them into one loan with one low payment. This might extend the length of time it takes to get the loans paid off, but with the lower payment, you have more income available for a mortgage payment.
  • Credit Cards – Minimum credit card payments can add up when you have many of them going on at once. If you are able to apply for one card or even one personal loan that can pay off all outstanding credit cards, leaving you with one payment, you will likely free up some of your money for your mortgage payment.

When you refinance your debts, make sure the terms are favorable to you and that your new payment will be less than the combined payment of the multiple debts it is paying off. If you refinance credit cards, make sure to close out those cards so that they are not providing you with more available credit than is necessary as that can have an impact on your overall credit score, which plays a role in your eligibility as well.

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Pay Debts Off

If you recently started your business and have a lot of outstanding credit because of the costs necessary to start the business, try to get those debts paid off as soon as possible. The quicker you pay the debts off, the higher your credit score will rise and the lower your debt ratio will become. The more bank statements you are able to provide the lender with for a bank statement loan, the better your rate will be, so try to get those debts paid off in the beginning stages of starting your business, allowing your income to accumulate after the fact. This way when you show the lender 24 months or more of banks statements, you are able to have a lower debt ratio because you paid off those initial debts that helped you get started.

Wait Until you are in Business for a While

Along with the ability to have fewer debts, being able to show at least 24 months of bank statements will help you be able to have a higher qualifying income. When you just start your business, income can fluctuate quite a bit during that first year. If you wait 2 years and your income steadily increased, your 24-month average income will be higher than the 12-month average, which means you will have more income to use for your debt ratio, bringing it down even lower.

Managing your debt ratio in order to qualify for bank statement loans is one of the most important ways to get a loan as a self-employed borrower. There are many lenders that offer alternative documentation loans, giving you plenty of opportunity get a mortgage even though you are self-employed. The key is to have all of your documents in order and your debts as low as possible in order to maximize your qualifying income. Apply with a variety of lenders for a bank statement loan to ensure that you get the best rate and terms available today!

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Qualification Requirements for Stated Asset Loans

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If you need an alternative document loan, you will have to meet certain requirements. First, you will need to find a lender that is even willing to write this type of loan. After the housing crisis, most lenders pulled out of the stated income/stated asset arena. They didn’t want to take the chance of dealing with defaulted loans.

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Today, though, more and more lenders are willing to write stated assets loans. Just how do you increase your chances of approval on one? Keep reading to find out more.

Have a High Credit Score

First, you need a high credit score. If you want a lender to take your word on your income or assets, you have to give them reason to do so. Think of the difference between a borrower with a high credit score and one with a low credit score.

The borrower with the high credit score probably manages his money correctly. He doesn’t overextend his credit or pay his bills late. Lenders look at him as a good risk. The borrower with a low credit score may not manage his money correctly. He may overextend his credit or pay his bills late. His credit history is typically filled with negative information that makes a lender wary of giving him a loan.

If you think about the risk of a lender offering a stated income or stated asset loan, they are taking your word for what you make or have. They take a much larger risk doing this for a borrower that doesn’t have a decent credit history. Making sure you have a high credit score before you apply for this type of loan can increase your chances of approval.

Have a Low Debt Ratio

A low debt ratio goes hand-in-hand with a high credit score. The more debt you have outstanding, the higher the risk of default you pose to a lender. You may find that it’s harder to find a willing lender when you have a high debt ratio.

This doesn’t mean that you can’t have any debt outstanding, but you should try to minimize the amount you have outstanding before you apply for the loan. If you have credit card debt, try to pay the balances off in full. If you aren’t able to pay them off in full, at the very least, try to get your balances paid down enough so that they are less than 30% of your total credit limit. Once you owe more than 30% of your credit limit, it’s a red flag to lenders, making them less likely to give you a loan.

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Have Stable Employment

Even if you are applying for a stated income loan, you still need to prove your employment. Lenders want to know that you have stability and reliability when it comes to your income. The longer you are at your job, the more stability you show a lender.

Ideally, you should have at least 2 years at the same job. This shows lenders that you are consistent with your efforts to stay at your job. It also gives you room for raises, putting you in a better financial situation moving forward. If you don’t have a 2-year history at the same job, you’ll need to explain why you made changes. Did you better yourself by taking a higher position? Did you go back to school to start in a different industry?

Your lender will need to know the exact reason you changed jobs so that they can gauge your ability to be successful at the new job. Since your job is the source of your income, your lender will need to make sure beyond a reasonable doubt that you are able to succeed in your chosen profession.

You can increase your chances of getting a stated asset loan by making sure all qualifying factors go above and beyond what the lender wants to see. Just meeting the basic guidelines isn’t enough. Lenders need to know that you are a good risk and that you don’t pose a high risk of default.

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The Best Mortgage for Self-Employed Borrowers

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Today’s economy requires many people to turn to self-employment to make a living. The unfortunate part of this, however, is that it becomes harder to obtain a mortgage when your income fluctuates so much. Self-employed borrowers typically have fluctuating income that makes it hard to pinpoint just how much they make. In addition, many self-employed borrowers write off a large number of expenses on their income taxes, making it look like they do not make nearly as much money as they really make. Because mortgage lenders are required to use the amount of money you make as reported on your tax returns, it becomes very difficult to qualify for a mortgage.

Applying for a Conventional Loan

If you have good credit and think your debt ratio is close enough to qualify for a conventional loan, you can apply for this type of loan. In order to qualify, however, you will have to provide full documentation which includes:

  • Last two years’ tax returns with all schedules
  • Business license
  • Bank statements
  • Current Profit & Loss statement

If the tax returns do not report income high enough to get your debt ratio down, you can do one of two things: apply for a different type of loan or wait a year or two and file your taxes with fewer write-offs in the future. Typically, potential borrowers choose to apply for a different type of loan.

A Great Alternative

Since most self-employed borrowers will not qualify for a conventional loan, there is a great alternative that makes it easy to qualify for a loan. This alternative is the Bank Statement Loan. This loan is as close to a subprime loan as a borrower can get today. As the name suggests, the lender uses your bank statements to verify your income rather than any paystubs or tax returns. The benefit to this method is that the lender can see the gross amount of money you put into your bank account every week or month, depending on how you get paid. In this case, your expenses are not taken into consideration as of yet – your total gross income is able to be used.

How the Income Gets Verified

Because bank statements have the potential of being forged, there are certain precautions lenders need to take with this type of loan. When you use tax returns to qualify for a loan, the lender can verify the amounts you provide them with the IRS through an activated IRS Form 4506 which allows the lender access to your tax transcripts directly from the IRS. Because bank statements do not have that type of verification, the lender must verify other things, such as:

  • Your self-employment and income from your CPA – The CPA can provide a letter of verification on his letterhead to verify your employment and income status
  • The presence of a business license to show that your business is legitimate
  • A bank’s stamp and date to verify that the account statements are real

Using the Right Account

You have to choose the right account to use to verify your income when you use a bank statement loan. You are unable to use both a business and personal account – you have to choose one or the other. If you do need to use both in order to qualify for the loan, it will be necessary to determine the difference between the two as the lender needs to make sure you are not “double dipping” or using business income in your business account and then again in your personal account.

Using Overtime Income for Mortgage Qualification

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Do you work overtime every now and then? Do you need that money to help you qualify for a slightly larger mortgage or maybe a mortgage at all?

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The good news is that you may be able to use your overtime to qualify for a mortgage. The bad news is that you must meet certain requirements in order to do so.

The Length of Time

First, you can’t use overtime that you just started receiving. Just like your regular income, lenders need to see a history of receipt of the income. Just how long you must receive it will depend on the lender. Some lenders allow the use of overtime income that you’ve received for just one year, while others make you wait two years.

What’s the difference and why do you have to wait so long? It has to do with consistency and reliability. If you only work overtime once in a while and it’s not a consistent thing, lenders won’t use it to qualify you for a mortgage. They can’t rely on it if it’s not something you receive on a regular basis. On the other hand, if you have been working overtime for the last two years, lenders can see a pattern, and figure out how much overtime to include in your qualifying income.

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Consistency of Your Overtime Income

Lenders need to see consistency in your overtime income over a period of months or years. What they want to see is stable and/or increasing income. If your overtime income seems to wane after a few months or there was a decrease from one year to the next, they may not be able to use it to qualify you for the loan.

Calculating Your Overtime Income

First, your lender will need to figure out which portion of your income is overtime. Using your W-2s or tax returns won’t suffice. While these documents show your total income received, they don’t break it down between regular and overtime income.

Instead, lenders will use your paystubs. Typically, you have to provide two paystubs, but you may need to provide more so that they can see the pattern of receipt of overtime income. Once the lender sees which income is overtime income, they will average the receipt over two years or however many years you’ve been receiving it. This allows lenders to account for the highs and lows. In other words, they can account for the times that you work overtime and the times that you don’t work overtime.

If a lender were to qualify you based on a recent period when you worked a lot of overtime, but you don’t have a history of working that much overtime, it could turn out bad in the end. If you become unable to afford your mortgage payment because the lender qualified you for too much, it could result in the loss of your home. If the lender uses an average, though, they can rest assured that they found the ‘happy medium’ and qualified you for a loan that you can afford.

Proving Continuance

One other large piece of the puzzle is proving the continuance of the overtime income. While no one can predict the future, lenders need to know that your overtime will continue for the next three years, for as far as they can see.

You can obtain this proof from your employer themselves. They need to complete what’s called a Verification of Employment. This form acknowledges your dates of employment as well as your income. On this document, your employer must state that your overtime is likely to continue for the next few years. While your lender realizes things can change, they need that reassurance from your employer in order to use your income.

Using overtime income is possible when all of the pieces of the puzzle fit. Talk to your lender about your overtime income and give them as many details as possible about it. The more they know about it, the more accurate an answer they can provide you for your loan.

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How Does an Asset-Based Mortgage Work?

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Did you know that you don’t have to have an income to qualify for a mortgage? As shocking as that sounds, it’s true. There’s a trick though. You have to be able to prove that you have enough assets to cover the mortgage payment for the next 30 years.

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The asset-based mortgage can help retirees or those just living off their assets to get a mortgage. Maybe you don’t want to exhaust all of your assets at once. If you don’t mind paying interest on the loan, you may be able to secure a mortgage even without verifying that you work.

What Type of Assets Can you Use?

You can use almost any type of liquid asset that you have available. In other words, you can’t use other pieces of real estate or a vehicle as an asset. But you can use things like your checking, savings, CDs, money markets, stocks, bonds, mutual funds, and even retirement accounts.

You should know, though, that you can only use 100% off any cash you have on hand. This includes any checking or savings accounts. Any assets tied up in an investment will be taken at 70% of the current value. This allows the lender to account for any taxes and/or fees you may pay for using the funds.

Does Age Matter?

Your age may matter when applying for an asset-based mortgage. There are two reasons for this – retirement age and the length you will hold the loan.

As far as retirement goes, lenders care about your age so that you don’t deplete your retirement savings before you are even of retirement age. If you apply for an asset-based mortgage using your 401K or IRA and you are over the age of 65, a lender may be willing to count those funds. Again, they will only use 70% of the value to qualify it as income, though.

If you are far from retirement age, a lender may not be willing to count your retirement funds as income. If you are too far from retirement, it can be risky to let you use those funds to pay your mortgage. What does that leave you with when you retire?

Finally, your age matters to help determine the length of the loan. Generally, lenders use 360 months to determine your income. In other words, they divide your total assets by 360 to come up with your monthly income. If you are over the age of say 75, the lender may divide your income over 120 months rather than 360 months. Anyone younger than 75 years old, though, will likely have their assets divvied up over 30 years, though.

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What Will Lenders Use to Qualify?

Once you have the total amount of your assets based on the 70% formula with the exception of cash, checking, or savings accounts, you divide that number by 360. See the example:

You have $1,500,000 in assets. $300,000 of it is in cash, the remainder is in stocks, bonds, and IRAs. You are 45-years old. Lenders will do the following:

$1,500,000 – $300,000 = $1,200,000

$1,200,000 x .70 = $840,000

$840,000 + $300,000 = $1,140,000

$1,140,000/360 = $3,167 monthly income

The lender will use this figure to determine how much you can afford each month, just as they would if you made money from employment.

Qualifying for the Loan

Once you know your monthly income, the rest of the qualification process works much the same as any other loan. You must meet the credit score and debt ratio requirements of each loan program. The lender needs to make sure that you can afford the loan beyond a reasonable doubt. They will do so by verifying all aspects of your loan including taking a long, hard look at your credit history.

The question you need to ask yourself is if the asset-based mortgage makes sense. Many people know this mortgage as an asset depletion mortgage. As the name suggests, you deplete your assets. You need to make sure this is a smart choice for you not only now, but well into the future. What will the future hold? How will you pay for your expenses moving forward? Are you retired for life or will you seek employment again sometime in the future?

These are things you must consider when determining if the asset-based mortgage makes sense. Talk with lenders to see what options are available to you and make sure you can comfortably afford the loan before making any decisions.

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Is There Such a Thing as a “Self-Employed Mortgage”?

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The economic crisis has everyone scrambling for mortgages in different ways. The popular belief is that there are no longer any loans aside from the straightforward conventional loans, but this is simply not true. Because of the influx of self-employed people throughout the country, more and more lenders have started offering loans that are less traditional than a standard conventional loan. What is not true that many people have begun to believe, however, is that there is such a thing as a “self-employed mortgage.” The difference between the loans a person that is self-employed would obtain versus someone with a straight salary is simply how the income is verified. The loan terms, rates (for the most part), and all other stipulations remain similar to the conventional loans.

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Verifying Income

What sets you apart from other salaried borrowers when you are self-employed is how you receive your income. You might only take draws during certain times of the year or have a fluctuating income that you receive on a regular basis, but the amount varies quite significantly. Maybe you take a large amount of deductions and credits on your income taxes; this could greatly reduce your qualifying income in the eyes of the lender as they use your adjusted income rather than the gross amount. Whatever the case may be, there are other ways to verify your income. The easiest way, if you cannot use your last two years’ worth of tax returns and a letter from your certified accountant is to use your bank statements. The more statements you can provide, the less risky you look to the lender. Generally, they want to see at least 24 months of statements. They then evaluate the income that came straight from your business during each month and average over that period of time. This can especially help you if you have seasonal or cyclical income that rises during certain periods and falls during others.

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Explanations are Important

If you are among the type of businesses that have fluctuating income, you should have your explanations ready for the lender, because they are going to ask. If you fumble around the question or do not have a straightforward answer right away, they may put less credibility towards your income. On the other hand, if you can prove that sales drop during certain periods because your product/service is dependent on the seasons or some other fluctuating factor, they can reason with the rise and fall in your income and qualify you accordingly. Some lenders will require you to write a formal Letter of Explanation that details the reasons for the increase and decrease in your income while others may just ask you verbally about it.

The most important thing you can do is realize that while there is no such thing as a “self-employed mortgage,” it is not impossible for you to get a mortgage if you are not employed by someone. The process might take a little longer, a little more creativity, and a little searching for the right lender, but the products are out there for you. Search for alternative documentation loans or bank statement loans to find lenders in your area that offer these loans and get the ball rolling to help you purchase a new home or even refinance your existing home into today’s lower rates.

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How Lenders Look at Self-Employed Income

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Lenders need to verify your income beyond a reasonable doubt. They do this with paystubs and W-2s. What if you don’t have those items because you work for yourself or are a contractor? Are you out of luck?

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Luckily, the answer is ‘no.’ You can still get a mortgage with self-employed income. However, different rules apply to you. Because you don’t have paystubs and W-2s, the lender will need more verification of your income. They need to make sure it’s legitimate and that it’s consistent – these are two very important factors.

Two Years is Crucial

The first step is the time you receive your self-employment income. Working for yourself for six months isn’t going to get you an approval. The magic number is 2 years – that’s how long lenders want to see you self-employed.

Why two years? It shows consistency and legitimacy. If they took your income after just six months, how are they to know if you’ll be successful? You have not even seen the ups and downs that an entire year can create yet. Two years is the time that things settle down and you can show a pattern of the ups and downs throughout your business cycle.

Calculating Self-Employed Income

Once you prove your job is legitimate, you need to determine how to prove your income. It starts with your tax returns. This is the easiest way to prove your income. However, it can also be the most damaging. As a business owner, chances are that you claim expenses that take away from your income. Your lender must take your net income claimed on your taxes. If you claim too many expenses, it can hurt your chances of getting a loan. If you know you’ll apply for a mortgage in the next couple of years, you may want to lay off the write-offs to keep your self-employed income looking as high as possible.

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So what do lenders need to calculate your income? They’ll need the following:

  • 2 years of individual tax returns
  • All schedules of your tax returns
  • W-2s if you pay yourself
  • 2 years of business tax returns
  • All schedules of your business tax returns
  • A Profit & Loss Statement for the year up to the current date

The lender will then take an average of your income. A 2-year average is best because again, it shows the ups and downs of your income. They will collaborate with your YTD P&L to make sure you currently make the same or nearly the same income that you claimed on your taxes.

Less Than 2-Year Self Employment

What if you have been self-employed for less than 2 years? You may be able to use your income, but only if you have a history in the same field. Say for example, you opened your own accounting firm. You have owned it for 1 year. However, before opening your own firm, you worked for another firm for 4 years. That shows the lender that you have the experience in the industry. Your likelihood of success is higher knowing that you have that experience.

In this case, a lender may take your 1-year income. However, if you did not have that experience as an accountant working for someone else before, you wouldn’t get that luxury. The lender needs proof that you know what it takes to be a successful accountant today.

Taking the Average

Basically, lenders will take an average of your 2-year income. Let’s say you claimed $75,000 income 2 years ago and $100,000 last year. The lender cannot use the $100,000 as your average income. Instead, they will use the average of the two years.

Here’s how that looks:

  • If the lender used just last year’s income, you would have an average monthly income of $8,333
  • If the lender used an average of the last 2 years’ of income, you would have an average monthly income of $7,292

While the latter income is lower, it’s more realistic of what you should base your mortgage payment on. If the lender used the higher $8,333, you might take on a mortgage you cannot comfortably afford year-round. The average helps account for the ups and downs your income likely experiences, ensuring that you can afford your mortgage payment no matter the time of year.

Self-employed income is complicated and takes more work to verify than employer-based income. It’s not impossible to get a mortgage, it may just take more time and more verification. The lender must verify beyond a reasonable doubt that you actually make the income you claim. They may ask for several bank statements, a business license, or letter from your CPA stating that you are self-employed and make what you claim. All of these steps are to make sure that you truly can afford the loan you asked to receive.

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Why Is It Difficult for the Self-Employed to Get a Mortgage?

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Why Is It Difficult for the Self-Employed to Get a Mortgage?

It’s an age-old question that gets validated every now and then by stories of one self-employed struggling to get a mortgage. Let’s look at the common barriers to mortgage financing for self-employed borrowers and how they can get past each hurdle.

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Are you self-employed? Define self-employed.

Sometimes, the cause of the problem lies with not knowing your true status. And the key to that lies with the IRS.

Are you engaged in a business as a sole proprietor or an independent contractor? Are you a member of a partnership that is engaged in business? Or are you in a business, e.g. part-time business, for yourself? Most likely, you are self-employed per the IRS standards.

And this self-employment status should reflect in the kind of taxes you are obligated to pay. There are two:

  1. An income tax return filed annually
  2. An estimated tax paid quarterly

Are you deducting business expenses?

Being self-employed in the eyes of the IRS, you may claim for deductions on expenses incurred in your line of business. Still, deductions from business expenses and other write-offs can reduce taxable income and lead to tax savings.

Therein lies another hurdle. The income you have in mind is different from the final taxable income calculated by the IRS. To the lender, you appear to be making less compared to what you are actually earning before tax.

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With a lower income on paper, your debt-to-income could be also affected. The debt-to-income ratio’s purpose is to determine whether you can comfortably take on the new mortgage debt. There are two ways to calculate the DTI with the front-end ratio, i.e. total housing costs relative to the gross monthly income is used for mortgages.

Are you talking with an expert?

When coming up with a tax plan to maximize your deductions, factor in the possibility of getting financing so as not be hurt by tax write-offs. It’s high time that you work with a CPA on the best tax approach.

Your CPA can also certify that you are indeed self-employed, which you can show to the lender as further proof of your status.

Lenders operate based on their guidelines for a specific mortgage product. While your status as a self-employed may prove to be extra challenging than the others, it doesn’t mean you’ll be rejected outright. Plan ahead and choose the mortgage loan that fits your need for a home.

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Getting a Non-QM Loan if You Are Newly Self-Employed

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Getting a Non-QM Loan if You Are Newly Self-Employed

A stable employment record is one of the most common qualifications for getting a mortgage. This leaves out a large chunk of the borrower market who are either self-employed or have seasonal jobs.

For individuals who have just ventured into self-employment, the common barrier is in showing evidence of steady income for the past two years. The shift in employment status will typically not look good for qualified mortgage lenders.

Good to know, however, that there are non-qualified mortgage alternatives that you can look into if your mortgage needs are urgent.

Non-Qualified Mortgage Defined

Non-Qualified Mortgages are simply home loan programs that do not meet the standards set by the Dodd-Frank Act of 2010. This rule establishes certain qualifications that serve to protect the lender and the borrower from the mess of default. These requirements include:

  • a DTI ratio not exceeding 43 percent
  • standard proof of income
  • standard amortization
  • points not exceeding 3 percent of the loan amount

Newly self-employed individuals would normally have a problem with giving a proper proof of income. That makes it hard for them to qualify for qualified mortgages. But that does not mean getting a home loan is impossible.

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A non-qualified mortgage is any of the available home loan programs today that have qualifying requirements not consistent with the aforementioned.

That means if you are newly self-employed, have a commission-based or seasonal job, or receive income from different sources, a Non-QM loan can get you covered.

From the look of it, it seems like Non-QM loans are risky business for borrowers, only taking advantage of their vulnerable situation. Fortunately, this is not the case. Non-QM loans still abide by the Ability to Repay Rules which ensure that the borrower’s income, employment, and credit history are duly verified. The lender still ensures that you have the capacity to repay the money you owe.

The Problem with History

Another common hindrance to loan approval for many newly self-employed individuals is the lack of income history as basis for the loan. If you have just started your slate, it’s likely that you still have very short history to show for your income. Lenders would like to see a positive possibility from your income sources, no matter the period. You can make this possible by:

a) opening a business within the same industry that you had been working for prior to your self-employment
b) partnering with someone who is experienced in the industry
c) being able to show the availability of financial reserves which can cover you should your business fail
d) showing non-delinquent payments from the time you started your self-employment

Non-QM loans are not backed by secondary markets that is why the programs are as diverse as they are. Lenders formulate their own qualifying criteria. You can ensure the approval of a non-QM loan if you have good income history no matter how short and a good financial backing via assets.

Speak with a lending professional today to be guided in your Non-QM application process.