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.