If you don’t ‘fit the mold’ so to speak when qualifying for a mortgage, you might think you are out of luck. Today’s guidelines are much stricter than ever before, leaving many people to mistakenly think they are unable to buy a home.
The good news is that there are many ways to get around the QM standards. Keep reading to learn how you can make this work for you.
Why Don’t You Qualify for a Mortgage?
First, you must look at the reason why you don’t qualify. Are you self-employed and don’t have a long enough history in your business yet? Maybe you have enough history, but your taxes don’t show nearly enough income for you to qualify. Some borrowers have perfectly fine credit and income, but their debt ratio exceeds the 43% threshold.
Whatever the case may be for you, pinpoint it. Figure out what sets you apart from the standard QM borrower. This way you will know what type of lender you will need. For example, if your tax returns show a lot less income than you actually make, you’ll need a lender that offers alternative income loans. If you have a high debt ratio, you’ll need a lender that is willing to go beyond the 43% threshold.
Make Sure You Have Compensating Factors
There’s a reason you need a non-QM loan. That reason likely makes you ‘high risk.’ In order to make up for that risk, you need compensating factors. They don’t have to be anything crazy – just something for the lender to feel good that you won’t default.
A few simple ideas include:
- Have a large down payment – The more money you put down, the less risk you pose to a lender. You have more ‘skin in the game’ and are more likely to make your payments on time.
- Have a low debt ratio – If you have irregular income or are newly self-employed, you’ll want a debt ratio that is as low as possible. This lowers the risk of default, making you a better risk in the lender’s eyes.
- Have a high credit score – A high credit score speaks for itself. It lets lenders know you make financially responsible decisions, which may make them more likely to give you a non-QM mortgage.
Find a Lender
Once you know why you need a non-QM loan, it’s time to find a lender. Every non-QM lender has different programs. This step may take a while. Because the lenders are non-QM, they can make their own rules up to a point. They still have to abide by the Ability to Repay Rules. These rules ensure that the lender determines that you can afford the loan beyond a reasonable doubt. In other words, the lender must verify your income in one way or another.
You will not find lenders that offer stated income or stated asset loans. Everything must be verified beyond a reasonable doubt. You will find lenders that accept any of the following though;
- Higher debt ratios
- Newly self-employed borrowers
- Bank statements as proof of income rather than tax returns
- Borrowers just coming off of a foreclosure or short sale
You will have to find the lender that offers what you need. That’s why figuring out why you need a non-QM loan is crucial.
Make Sure you Can Afford the Loan
As we touched on above, you have to prove you can afford the loan. The Ability to Repay Rules apply to every loan. This way lenders cannot give out loans that borrowers find impossible to afford down the road.
Before you apply, check out your current debt ratio. Compare your total liabilities to your gross monthly income. If you are self-employed or work on commission, take a 2-year average of your income, as that is what lenders will use. Is your total debt ratio high? Consider 43% as your benchmark and that includes the new mortgage payment. If you are already near that without the mortgage payment, it could be hard to find a lender.
If, however, you are not near the 43% mark, you may have a better chance. In other words, the fewer debts you have going into the mortgage application, the better your chances of approval.
Getting a non-QM loan is the same as getting a QM loan. You have to qualify for it. This means having a decent credit score, debt ratio, and a good amount of assets. With this type of loan, though, if you don’t qualify with one lender, you can shop around with many others. Chances are that you will find a willing lender if you look hard enough.