What Are Non-QM Loans, aka Asset-Based Loans?

Mortgage loans are the most common way to help homebuyers finance the cost of a home. But what happens if you don’t meet certain qualifying loan criteria because you’re self-employed or struggle to prove a steady income?

That doesn’t necessarily mean you’re going to be a lifelong renter. Other loan options exist to help.

Non-qualified mortgage (Non-QM) loans, also known as asset-based loans, are a less traditional way to purchase property. Unlike most other mortgages, approval for non-QM loans does not rely solely on your income or credit score.

Speak to a Better Mortgage Loan Consultant to see if a non-QM loan is right for you, by calling: (415)523-8837.

What is non-QM or asset-based lending?

Just because you may need to consider a non-qualified mortgage doesn’t necessarily mean you’re not qualified to obtain home financing. Instead, a non-qualified loan simply means the mortgage itself does not meet specific standards set by the Consumer Financial Protection Bureau (CFPB).

To be approved for a traditional, or “qualified,” home loan, a borrower usually must:

• Earn a monthly income that is at least two times the monthly payment on the loan
• Purchase a primary home that they occupy themselves
• Have a low debt-to-income ratio
• Have a credit score of at least 620 (though there are exceptions to this requirement)

Non-QM loans are often used for borrowers who do not meet the criteria for a traditional loan but can handle monthly mortgage payments. These loans tend to have more lenient credit requirements and require less documentation. Therefore, they may be a great option for:

• Borrowers with less-than-stellar credit or high debt-to-income ratio
• Self-employed borrowers or business owners
• Independent contractors
• Real estate investors
• Retirees or people living on investment proceeds

Different types of asset-based lending

There are various asset-based loans, all with their own benefits and general qualifying guidelines.

Debt service coverage ratio (DSCR) loans

A debt service coverage ratio loan is a type of non-QM loan designed with real estate investment in mind.

It’s a way to qualify for financing that focuses on individual property cash flow rather than your total income and liabilities. While these loans are typically used for commercial properties, they can also be used for residential investment property mortgages.

Approval for these non-QM loans centers around the DSCR ratio, which measures your ability to repay the loan with cash flow from real estate operations. Here’s the formula lenders typically use to determine your DSCR ratio:

*Debt service = Principal, interest, taxes, insurance, and association dues (PITIA)

The higher the DSCR ratio, the more likely a lender is to approve a financing request for a real estate purchase.

Speak to a Better Mortgage Loan Consultant to see if a non-QM loan is right for you, by calling: (415)523-8837.

Bank statement loans

Bank statement loans allow lenders to issue loan approvals based on personal information and bank statements, rather than tax returns and employer verification. This makes them potentially ideal for consultants, freelancers, small business owners, real estate investors, or anyone who doesn’t have a steady cash flow or has trouble proving their income after business write-offs or deductions.

While requirements vary by lender, common documents and criteria for a bank statement loan include:

• 12 to 24 months of personal or business bank statements
• Two years’ history of self-employment
• A good credit score (varies by lender)
• Business license (if applicable)
• Enough cash or other liquid funds to cover several months of your mortgage payments
• Proof of any liquid assets, such as a 401(k) or investments

Asset depletion loans

Employment income is a main factor when lenders consider qualifying someone for a typical mortgage. But in some cases, borrowers can afford a mortgage even if they don’t receive a regular paycheck.

In these scenarios, asset depletion loans can help because they use a formula to help borrowers get approved for a mortgage by counting their saved assets as monthly income.

For instance, let’s say you’re a new business owner, and you don’t have enough verifiable income to qualify for a traditional mortgage. However, you have large sums of money in investment accounts that can easily help you pay for a mortgage. In this case, your lender could use those assets to determine a hypothetical income stream.

To do so, lenders add the value of all your qualifying assets and divide the amount by the number of repayment months to calculate your maximum loan amount.

Keep in mind, some lenders may only use a percentage of certain asset’s values when calculating how much you can afford. For example, 100% of your savings and checking balances may typically be used, while 401k or similar investment balances could be limited to 70% to account for taxes or early withdrawal penalties.

Why do banks offer non-QM loans?

Put simply, banks make money by lending money and charging interest on the funds lended. The more low-risk loans they approve, the higher their income potential.

That may be why it's uncommon for banks to offer asset based lending. Without traditional loan criteria, most lenders view non-QM loans as high risk. But some banks and lenders, like Better Mortgage, choose to offer alternative qualification options to help customers who may not be well served by traditional loan products.

Offering non-QM loans allows banks to say “yes!” more often than they could with only traditional loan products.

With less government restrictions and requirements, lenders can provide loans to borrowers who don’t meet the strict qualification and documentation requests of a qualified mortgage but still have the means to pay for home financing.

Why are rates higher for asset-based mortgages?

Lenders tend to raise rates when they’re up against more risk. Therefore, borrowers are likely to pay higher interest rates and even upfront fees and points for non-QM loans that may not be necessary for qualified mortgages.

On average, non-QM loans have interest rates 1.25% higher than a qualified mortgage. No matter the type of loan, it’s always important to shop around for rates to ensure you’re getting the best offer possible.

Get qualified for a non-QM loan

With traditional mortgage loans, it can be difficult to find a lender who will approve you when you have a hard time proving your income. Luckily, non-QM loans can pave the road to homeownership when you don’t meet the traditional criteria but still have the financial means to pay a monthly mortgage.

Speak to a Better Mortgage Loan Consultant to see if a non-QM loan is right for you, by calling: (415)523-8837.