Non-QM loans (or non-qualifying loans) are home loans that do not meet agency lending rules outlined by the CFPB. They do not follow the standard qualification process which usually involves checking W2s, tax returns, paystubs, bank statements and other documents that verify you make enough money to eventually pay back your home loan. In essence these programs make a “good faith determination” based on the factors in each scenario.
This sounds pretty risky for a lender but these loans have higher down payment requirements so homebuyers have more ‘skin in the game’. Lenders are able to offer more flexible income requirements while requiring higher down payments and interest rates to offset the added risk.
There are many different programs that fall under non-QM loans that could really relate to any borrower from a self-employed entrepreneur or independent contractor, a real estate investor, or a Foreign National purchasing or refinancing a home in the United States. There are also options for W2 employees who recently filed bankruptcy or foreclosure for example.
These loan are designed for the self-employed or 1099 self-contractor that may have a lot of expenses or doesn’t show the right amount of income on tax returns. This unique program is designed to look at bank deposits (representing revenue) in either a personal or business bank account. Income is derived from those deposits over 12 or 24 months then calculated based on certain other criteria related to the business or type of business.