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.

Benefits of Non-Qualified Mortgage to First Time Homebuyers

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Having a home of your own is a wonderful accomplishment. It is symbolic of many things – independence, security, status. Nonetheless, the greatest thing about home ownership is that it teaches financial responsibility. There’s nothing like paying a monthly mortgage to understand and appreciate the beauty in budgeting. In some cases, the present circumstances of a borrower prevent him from qualifying for the usual loan products. Fortunately, there’s such a thing as a non-qualified mortgage.

Before we launch into a discussion of this loan’s benefits, let’s first take a quick look at what gave rise to the NON-QM.

Non-Qualified Mortgage and the Demand that Prompted It

Even now, when there are many affordable places to live in the US, buying real estate is not cheap. In most cases, you’ll need to put down a sizable down payment in order to snag that three-bedroom suburban townhouse. The process is not easy either. Conventional loans require documentation to prove that you are a secure investment. This includes tax forms and employment records. Federally backed mortgages just mean more paperwork.

There are those who don’t fit the profile of a conventional borrower. These individuals are either extremely wealthy but don’t have regular jobs, or have household incomes that are well below the average. Still, these people have the right to seek a means towards homeownership.

The solution? A loan option with a DTI ratio above 43% and none of the usual documentation.

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Non-Qualified Mortgage and Its Appeal to Lenders

Lenders, armed with liability protection from the Dodd-Frank Act, are being encouraged to originate this type of loan due to demand and potential profit. They can also enjoy specific advantages like:

  • Reduced competition
  • Minimal infrastructure changes

Non-Qualified Mortgage and Its Benefits to Borrowers

Here are some of the noteworthy benefits of a non-qualified mortgage:

  • There’s no need to present an extensive amount of paperwork in order for the lender to be confident in the borrower’s ability to repay the loan.
  • Income verification can be done through bank statements, not tax forms and paystubs.
  • The term can go up to 40 years for this type of loan.
  • Fixed assets can be used to qualify for a loan, in the event that money/income falls short.

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What is a No-Income-Verification Loan?

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What is a No-Income-Verification Loan?

Today, a no income verification loan differs from what it used to be before the housing crisis. Rewinding to 8 to 10 years ago, a no income verification loan meant that you did not have to provide anything but great credit to a bank in order to obtain a loan. After the housing crisis and the overabundance of foreclosures on the market, those loans became a thing of the past. Today, they are slowly making a comeback, but they are much different than ever before.

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What does No Income Verification Mean?

Today, no income verification means that you are more than likely self-employed and cannot easily verify your income. If your tax returns show a much lower income than you make today, you might be eligible for this type of loan, assuming you have excellent credit. Lenders need some type of reassurance that you are a low risk – they cannot just hand out a loan without full verification of your income without knowing that you are financially responsible. Today, no verification of your income means that you either do not provide your tax returns, but rather provide asset statements and excellent credit. In some cases, however, it could mean that the lender asks for access to your tax transcripts via an executed IRS Form 4506.

What Type of Equity Must you Have?

The best way to get approved for a no income verification loan is to have a large amount of equity in the property. This can mean one of two things:

  • If you are purchasing a property, you need to be able to put a large amount of money down on the home. This means more than 20 percent, which is the standard requirement; it means closer to 40 percent if you want a bank to take you seriously.
  • If you own the property and need to refinance, you need to have at least 40 percent equity in the home in order to qualify in most cases.

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Employment still Verified

What no income verification loans does  not mean is that the lender will not verify your employment. You must be employed or self-employed and be able to verify it. If you are employed, you must work on commission or mostly bonuses if you want to use the no income verification loan. Otherwise, it would be like lying on your application if you do not want the lender verifying your income. On the other hand, if you work on commission or bonus, your tax returns could report a much lower amount of income than you actually make because of the number of expenses and other write-offs you take advantage of in order to lower your tax liability. In this case, the lender can verify your employment, rather than your income.

If you are self-employed, the lender can still verify your employment. This can be done in one of two ways:

  • Provide your license to operate the business – If your business requires any type of specific licensing, you can provide it to the lender for proof of your business. Typically, the lender will require a little more verification as well, such as receipt of income from the company in your bank account or even bank statements from the company in your name.
  • Provide a letter from your CPA – The best way to verify your self-employment is by providing a letter from your CPA on his letterhead. The CPA must state that he handles your finances for the business and that you are in fact, in business for yourself.

Compensating Factors are Important

One of the most important things you can do for yourself when you try to obtain a no income verification loan is to have compensating factors. The given requirements include excellent credit and adequate equity in the property. Beyond that, however, you can provide the lender with other reasons to take a chance on you. These compensating factors can include any of the following:

  • A housing history with no late payments in the past few years. This shows your financial responsibility towards your housing liabilities.
  • No collections or judgments on your credit report to further your ability to show your financial responsibility.
  • Reserves on hand in your checking or savings account that equal 6 to 12 months’ worth of mortgage payments also show financial responsibility.
  • Long-term employment that you can verify. The longer you have been at the same employer, the less risk you pose to the lender.

The bottom line is that you have to look at the entire picture when it comes to applying for a no income verification loan. You cannot expect that just because you have good credit that you will get approved. The lender will need to see an entire financial picture that shows responsibility and very little risk. The best way to do this is to borrow as little as possible, which means saving up in order to have a large down payment or waiting until you have extensive equity in the home that you own before you refinance. In addition, the more stability you can show with your employment, whether you work for someone or yourself, can further your likelihood of getting approved. The more compensating factors you have to make up for the fact that you cannot fully verify your income, the better. In some cases, borrowers can replace their standard income documents with asset statements, showing receipt of the income, while other times, even that is not possible.

Whatever the case may be for you – embrace what you have and showcase the positives to a lender. The more you work on your credit and your savings, the better time you will have with any lender. The good news is, however, that there are plenty of lenders out there that are handing out no income verification loans today – you just have to be able to appeal to what they are looking to fill. If one lender turns you down, do not give up – keep shopping until you find a lender that your attributes meet.

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

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Do I Have to do a Stated Income Mortgage if I’m Self-Employed?

You might have heard of the stated income mortgage as being a “ self-employed” person’s mortgage, but in reality, it is not the only way for self-employed borrowers to get a loan. The only reason that borrowers that work for themselves must use a stated income mortgage is when they cannot fully verify their income. This is usually due to the fact that these borrowers write off a great number of expenses on their tax returns in order to lower their tax liability. While this helps in terms of paying their taxes, it makes their income look lower to the lender, making it hard to qualify with a higher debt ratio and low income. If on the other hand, your self-employment is fully verifiable, you are more than welcome to apply for a fully documented loan, just be aware that you will have to provide all schedules of your tax return in order for the lender to properly determine your average income. Typically, lenders take a two-year average of self-employed income, which means if the year before last year you had a rough year, yet last year was great, the average income will be lower than you anticipated the lender using.

What’s the Difference Between the Mortgage Types?

There are a few differences between the stated income mortgage and a fully documented mortgage. They are as follows:

  • The most obvious difference is the way you verify your employment; with the stated income loan you do not verify your income and with a fully verified loan, you document your income
  • The interest rate is typically higher on a stated income loan because it poses a higher risk to the lender, which means a higher interest rate
  • There are fewer lenders that offer the stated income mortgage than offers fully verified FHA, VA, or conventional loans

Both mortgages enable you to purchase a home and give the same types of terms, including 15, 20, or 30-year fixed terms as well as several adjustable rate terms. The largest difference, in the end, is usually the interest rate and the fees charged.

What does the Mortgage Lender Need?

If you are self-employed, you will need to provide the lender with different documentation than you would if you were a salaried employee. Typically you will need to provide the following:

  • Tax returns for the past two years
  • Bank statements for the last 12 months for both personal and business accounts
  • Letter from your CPA verifying that you are in business for yourself
  • Proof of the license for your company
  • An executed IRS Form 4506

The lender will take these documents and evaluate your income to determine if you qualify for a fully documented loan. The income will usually be taken as is, meaning the bottom line after you write off all of your expenses, but there are some exceptions to the rule:

  • Depletion
  • Depreciation
  • Large expenses that are non-recurring

If you have any of these expenses written off on your taxes, you might be able to add them back into your income, to help make your income higher. This is one of the reasons you should always talk to your lender about your ability to use a fully documented loan – if the lender allows specific expenses to be added back into your income, you might qualify for a fully documented loan, saving you plenty of money down the road.

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How you can Plan

The good news is that you can plan ahead for your desire to obtain a mortgage. This is especially important if you are self-employed. If you know that you plan on purchasing a home in the next year or two, consider your choices for tax filing this year. While you might save some money on your tax liability, you will likely pay the price by having to take on a stated income loan, which means more fees and a higher interest rate. It pays to do the math ahead of time. If you plan on staying in your home for a long time, you will want to do whatever you can to obtain a low-interest rate. In some cases, this could mean lowering the amount of write-offs you take in order to maximize your qualifying income. The higher your income, the more likely it is that you can use a fully documented loan, rather than a stated income loan.

Another way to plan is to start saving as much money as you can. The higher the down payment that you have, the lower risk you pose to the lender. In addition, once you put the desired down payment down, if you have reserves on hand, you can use them as a compensating factor to help you qualify for the loan. Even if you have to take a stated income loan because your income does not look high enough on your tax returns, having six to twelve months’ worth of reserves on hand helps to lower your risk. This means that the lender will likely be able to provide you with a lower interest rate, saving you money in the long run.

Talk to your lender to see what you might qualify to receive given your self-employment income. If you draw a salary on a regular basis, it might be easier to qualify, but even if you do not, there are ways to maximize your qualifying income so that you can use a fully documented loan. If you must take a stated income loan, just make sure to shop around with different lenders. Some lenders will be able to take higher risks and not have to change you as much as other lenders charge. Remember, you can always negotiate different fees and interest rates as well – do not just settle for the first quote you are provided, you have the right to shop around and negotiate until you get the terms you think are most affordable.

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