Non-Qualified Loan

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.

Why Subprime Loans are Necessary Today

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If you say the word “subprime loan” to a banker, you will likely see him cringe in return. Bankers do not like the term subprime any longer and are not making subprime loans as of today, so to speak. What they are offering, are loans with a different name – Non QM Loans, which stands for non-Qualified Mortgage Loans. That sounds a little better, doesn’t it? It could be just because of the tarnished name that subprime got over the years of the housing crisis, but whatever the case may be, non QM loans are making a comeback and a necessary comeback at that.

Subprime Loans get more people into homes, let’s get your family into one»

Qualified Mortgages are Not for Everyone

A qualified mortgage is a mortgage that meets very strict guidelines. These are the mortgages that Fannie Mae, Freddie Mac, FHA, VA, and the USDA will purchase and/or guarantee. These loans fit a perfect mold and are a perfect fit for certain borrowers – but not all borrowers! Unfortunately, the housing crisis did not only hurt the banks, it hurt consumers too. Many of these consumers have not quite bounced back to the point that they would fit the mold of standard, conventional lending. This leaves them without the ability to get a home, unless they obtain a non-QM loan. Getting around the QM guidelines, these lenders are requiring other mitigating factors to make up for whatever it is that prevents the consumer from falling under the Qualified Mortgage guidelines. Typically, it is the debt ratio that is making these loans non-qualified as 43% is the maximum to qualify. The borrowers that have lower credit scores are naturally going to be charged a higher interest rate, which then pushes their DTI over that threshold – making them “subprime.”

Getting More People into Homes

The Qualified Mortgage guidelines are pushing people that had recent credit issues away from owning a home, which is why the non-QM loans are making a comeback. These are the loans for people that had bad things happen to them – maybe they suffered a bankruptcy or foreclosure or maybe they defaulted on several credit lines as a result of losing their job or being downsized. These life events may have passed for these people and they are trying to make a name for themselves again, but with the stricter mortgage guidelines in place, it is becoming impossible.

Qualified Mortgage is not for everyone, consider a Non-QM loan»

Subprime Means Something Different Today

Just because a loan is non-QM today, does not mean that it must not meet the Ability to Repay Rules – yet another rule put into place by the Dodd-Frank Act. This rule states that each borrower must be able to pay the loan by proving their income and assets; be able to verify their employment; have all payments figured into their debt ratio that apply to the house as well as other monthly obligations; and have satisfactory credit history. To sum it up, it means that banks must do their due diligence to ensure that a borrower can in fact, afford the loan despite the slightly higher interest rate that may be charged. Lenders are still unable to charge excessive fees or provide risky terms, such as negative amortization or interest only payments. Basically, the borrowers allowed the non-QM loans are those that have a credit history that does not allow them to qualify for a standard loan yet they can prove that they can afford the loan.

If you are looking for a loan and do not fall within the conforming or FHA guidelines, non-QM loans could be your best bet. As long as you have compensating factors for your lower credit score or poor credit history, such as any of the following, you may have better luck than you think at getting a loan.

  • Excessive reserves/assets
  • Low debt ratio
  • High down payment
  • Stable employment history

More and more investors are realizing the profits to be had in the non-QM lending industry and the benefit it will have on the economy. Many lenders are still keeping these loans on their own books, but as more and more investors come forward, the funds will begin to pool and more non-QM loans will begin to flood the market, making getting a loan easier yet today, but not as easy as we saw in the early 2000’s.

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