Non Qualified Mortgage (NON-QM)
Non-QM loans, or non-qualified mortgages, have emerged as a valuable option for borrowers with unique financial circumstances. They represent a departure from traditional lending standards by offering flexibility in income verification and borrower eligibility criteria. Unlike qualified mortgages (QM), which adhere strictly to regulatory guidelines, non-QM loans cater to individuals with non-traditional income sources, self-employed professionals, and those with credit challenges or high DTI ratio. It simply means that the borrowers fall outside of the “ability to repay” guidelines. They were established by the Consumer Finance Protection Bureau after the 2008 financial crisis, and they indicate whether a borrower is likely to repay a mortgage.
DSCR Loans
Key features:
- No personal income required
- Down payments as little as 20%
- Qualify based on cash flow
What is a DSCR?
A DSCR loan is a measure of the cash flow a borrower has to pay against current debt obligations for an investment property. A DSCR loan is a type of non-QM loan used by real estate investors to help them qualify for a loan based on their property’s cash flow, without having to verify personal income.
How do you qualify for DSCR
It’s actually very simple to qualify for a DSCR loan. The property must generate enough rental income to offset the mortgage payment plus other expenses associated with the investment property. The minimum debt service coverage ratio required is between 1.1x and 1.2x, which means the property must produce between 10% and 20% net positive cash flow after all expenses have been deducted.
How does DSCR Work
The debt service coverage ratio is calculated by simply dividing the net operating income of the investment property by the debt obligations. For example – if your annual income is 100,000, and you know the debt obligations are $80,000, then your DSCR is 1.25 (100,000 / 80,000).
What is a good DSCR ratio?
A debt service coverage ratio of 1.0 indicates your investment property is generating sufficient income to just cover the mortgage payments and expenses. A DSCR greater than 1.2 is typically considered a good ratio for residential investment property.
DSCR Loan requirement
- No personal income documents required to qualify. Qualifying factors are based on the cash flow of the subject property
- Debt service coverage ratio of 1.1x – 1.2x
- Up to 80% max loan-to-value (LTV) ratio
- Available as 30-year fixed or 5/1 adjustable rate mortgage
- Eligible property types are 1‐2 family and warrantable condos
- Fixed-rate loan type
- No prepayment penalty
- Minimum loan amount of $175,000 required to apply
Asset Depletion Loan
What is an asset depletion loan?
Also known as ‘asset dissipation,’ asset depletion is a way to qualify for a loan using substantial assets rather than income from employment.
With an asset depletion mortgage, your monthly ‘income’ is calculated by dividing your total liquid assets by 360 months (the duration of most mortgage loans).
In this way, you can prove you have enough money to cover the loan even without regular income from employment.
Using funds from asset depletion does not mean you have to qualify solely based on your assets. You may use it as an additional ‘income’ source on top of any regular income you currently receive.
That said, borrowers who use an asset depletion program to qualify do not need to show any other sources of income or employment. If their assets are sufficient to pay for the loan — as well as regular living expenses — they can qualify based solely on that calculation.
In addition, mortgage borrowers are not required to cash in their assets right away. The assets are only used to demonstrate an ability to make the mortgage and housing payments.
How asset depletion mortgages work
Asset depletion loans use your assets as collateral instead of your income. This program allows you to deplete your assets as a way to count that money as income for the duration of the loan. There are a few facts and figures borrowers need to understand before diving into an asset depletion program.
Eligible assets for mortgage qualifying
First, understand that only certain types of assets can be used for mortgage qualifying. These typically include:
- Checking or savings accounts
- Money market accounts
- Certificates of Deposit (CD)
- Investment accounts such as stocks, bonds, and mutual funds
- Retirement accounts such as a 401k or IRA
Not all retirement accounts will qualify, depending on the mortgage borrower’s age and potential penalties applied for accessing funds in the account.
Lenders may only allow a partial credit, or no credit at all, for assets in retirement accounts if the mortgage borrower isn’t yet at or near retirement age.
How much of your assets are counted?
Even for allowable assets, lenders won’t necessarily count the whole amount toward your mortgage ‘income.’
- For liquid assets — like a savings account — lenders typically count 100 percent of the funds
- Investment assets may be calculated at around 70 percent of your total holdings
- For retirement accounts, only 50 to 70 percent of funds may be counted, depending on the borrower’s age
The exact calculations vary by lender — which means it’s extra important to compare different mortgage lenders and find an asset depletion program that fits your needs.
The asset balance is divided by 360. That amount is used as your monthly income when qualifying.
Once your total assets have been calculated, the balance is divided by 360 (regardless of loan terms) to be split into monthly installments. These installments are then used to meet income requirements for the loan.
Asset depletion mortgage requirements
Lenders don’t just look at a borrower’s assets when qualifying them for an asset depletion loan. They also need to meet mortgage lending requirements.
Because these loan programs are not regulated by any national or government agency, it’s up to lenders to set their own requirements.
That means asset depletion loan guidelines can vary a lot from one lender to the next.
Typically, borrowers should expect to need:
- A down payment of 25 to 30 percent
- A credit score of 680-700 or higher
- A debt-to-income ratio below 50 percent
Asset depletion mortgage example
Let’s say a 49-year-old mortgage borrower has $2,000,000 in liquid assets, and another $500,000 in retirement or investment accounts.
Here’s how their monthly income might be calculated.
- Retirement account — 70% of $500,000=$350,000
- Total assets counted — $2,000,000+$350,000=$2,350,000
- Monthly income — $2,350,000/360=$6,527
In this case, the lender will calculate the borrower’s maximum mortgage payment based on a monthly ‘income’ of $6,527.
Remember, this is their total income — not their maximum mortgage payment.
The amount they can spend on a mortgage depends on their existing debts and the lender’s maximum debt-to-income ratio.
If the lender enforces a maximum debt-to-income ratio of 36 percent, the maximum possible mortgage payment in this scenario is $2,350.
But, say the borrower has existing debts. This reduces the amount they can spend on their mortgage each month.
If the borrower in this scenario has existing debt payments of $350 per month, their maximum mortgage payment is reduced to $2,000 per month.
Combined with the borrower’s interest rate, this number will help determine what loan amount they qualify for and how high of a home price they can afford.
Should you use an asset depletion mortgage?
Wondering whether or not you are a good candidate for an asset depletion program?
Start by answering these questions:
- Are you retired with very little fixed income (or no income)?
- Are you self-employed but show little to no income?
- Are your assets held in the U.S.?
- Do you have Trust assets with totally unrestricted use?
- Do you have 25 to 30 percent for the down payment?
If you answered yes to any of these questions, but you’re asset-rich, an asset depletion loan could be an ideal solution.
However, it’s not the only option.
Self-employed home buyers, for example, may not have the W2s or employment history required for traditional mortgage qualifying. But they can often get a bank statement loan that looks at regular monthly cash deposits instead of their tax returns.
Profit and Loss Mortgages
What is a profit and loss mortgage?
When self-employed borrowers are unable to qualify under GSE mortgage guidelines, Profit and Loss (P&L) Statement mortgages offer a simple solution. Our P&L allows us to determine the monthly qualifying income of your clients based solely on 1- or 2-year P&L statements prepared by either their CPA or a licensed tax preparer.
This means no tax returns, transcripts or bank statements are required to qualify under this program.
Self-employed individuals have a more difficult time qualifying for a traditional mortgage. At BM, we offer our Non-QM 1-year and 2-year P&L Only loans to help them.
Borrowers can qualify for an A&D loan based on the strength of their business’s Profit & Loss (P&L) statement only. No bank statements are required.
Highlights:
- No bank st required
- Yes to Business owners
- No score or min FICO 660
- Up to 80% CLTV on 2Y and up to 80% CLTV on 1Y
- Loan Amount up to $4 Million
- P&L by Licensed CPA, Enrolled Tax Agent, or Licensed Tax Preparer
- 3-month Reserves
- DTI up to 55% for owner-occupied
- Max cash-in-hand $1 Million, no limit to CLTV
Who can get profit and loss mortgage?
- Businesses/self-employed workers who received income exclusively from cash and may not keep perfect records of their transactions.
- Businesses/self-employed workers with seasonal income, and/or make intermittent deposits that do not follow a regular predictable pattern on a weekly or monthly basis.
- Businesses/self-employed workers that have been in business for more than 2 years.
Hard Money Loans
What Is a Hard Money Loan?
A hard money loan is a type of loan that is secured by real property. Hard money loans are considered loans of “last resort” or short-term bridge loans. These loans are primarily used in real estate transactions, with the lender generally being individuals or companies and not banks.
Key Takeaways
- Hard money loans are primarily used for real estate transactions.
- They are generally money from an individual or company, and not a bank.
- A hard money loan is a way to raise money quickly but at a higher cost.
- Because hard money loans rely on collateral rather than the financial position of the applicant, the funding time frame is shorter.
- Terms of hard money loans can often be negotiated between the lender and the borrower.
- These loans typically use property as collateral.
How a Hard Money Loan Works
Hard money loans have terms based mainly on the value of the property being used as collateral, not on the creditworthiness of the borrower. Since traditional lenders, such as banks, do not make hard money loans, hard money lenders are often private individuals or companies that see value in this type of potentially risky venture.
Interest Rates on Hard Money Loans
Hard money loans generally have a higher interest rate than traditional mortgages. As of July 2022, the average interest rate offered on a hard money loan was between 10% and 18%. This makes hard money loans much more expensive than a regular mortgage.
For flippers and short-term investors, this might not matter. They may plan to pay the loan back quickly, and this will reduce the effect of a high interest rate and make the loan cheaper. For most other people, however, it makes sense to look for a loan with a lower interest rate. The primary advantage of a hard money loan is speed; if you can wait a few months for your loan to come through, it might be better to look at refinancing your home or taking out a personal loan.
Examples of Hard Money Loan
Hard money loans are typically used by real estate investors, developers, and flippers. Hard money loans can be arranged much more quickly than a loan through a traditional bank. In some cases, hard money lenders can issue funds in as little as 10 business days, while traditional banks have a wait time of 30-50 days for funding. Most hard money lenders can lend up to 65% to 75% of the property’s current value, and loan terms are generally short – 6 to 18 months.
Hard money loans may be sought by property flippers who plan to renovate and resell the real estate that is used as collateral for the financing—often within one year, if not sooner. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly.2
Hard money loans may be used in turnaround situations, short-term financing, and by borrowers with poor credit but substantial equity in their property. Since it can be issued quickly, a hard money loan can be used as a way to stave off foreclosure.
Special Considerations for Hard Money Loans
The cost of a hard money loan to the borrower is typically higher than financing available through banks or government lending programs, reflecting the higher risk that the lender is taking by offering the financing. However, the increased expense is a tradeoff for faster access to capital, a less stringent approval process, and potential flexibility in the repayment schedule.
Pros and Cons of a Hard Money Loan
As with any financial product, there are advantages and disadvantages to hard money loans. These loans are quick and easy to arrange and have high loan-to-value (LTV) ratios, but also high interest rates.
Pros
One advantage to a hard money loan is the approval process, which tends to be much quicker than applying for a mortgage or other traditional loan through a bank. The private investors who back the hard money loan can make decisions faster because the lender is focused on collateral rather than an applicant’s financial position.
Lenders spend less time combing through a loan application verifying income and reviewing financial documents, for example. If the borrower has an existing relationship with the lender, the process will be even smoother.
Hard loan investors aren’t as concerned with receiving repayment because there may be an even greater value and opportunity for them to resell the property themselves if the borrower defaults.
Cons
Since the property itself is used as the only protection against default, hard money loans usually have lower LTV ratios than traditional loans: around 50% to 75%, vs. 80% for regular mortgages (though it can go higher if the borrower is an experienced flipper).
Also, the interest rates tend to be high. For hard money loans, the rates can be even higher than those of subprime loans.
Another disadvantage is that hard loan lenders might elect to not provide financing for an owner-occupied residence because of regulatory oversight and compliance rules.
What Are Typical Terms for Hard Money Loan?
Hard money loans are a form of short-term financing, with the loan term lasting between 3 and 36 months. Most hard money lenders can lend up to 65% to 75% of the property’s current value, at an interest rate of 10% to 18%.
Is a Hard Money Loan a Good Investment?
It depends what you use the money for. Hard money loans are a good fit for wealthy investors who need to get funding for an investment property quickly, without any of the red tape that goes along with bank financing. They can be useful to pay for a one-time expense or project, but only if you are reasonably sure you’ll have the money to pay back the loan.
What Are The Risks of a Hard Money Loan?
Hard money lenders typically charge a higher interest rate because they’re assuming more risk than a traditional lender would. They may require a higher down payment than a traditional loan would, and you’ll have a shorter period to pay back the loan.
The Bottom Line
Hard money loans are typically used by real estate investors, developers, and flippers. They can be arranged much more quickly than a loan through a traditional bank, and loan terms are generally short – 6 to 18 months. Hard money loans may be sought by investors who plan to renovate and resell the real estate that is used as collateral for the financing. The higher cost of a hard money loan is offset by the fact that the borrower intends to pay off the loan relatively quickly.
Stand Alone 1099 Loans
Our stand alone 1099 Only loan is an excellent solution for those that receive compensation in the form of commission or independent contractor basis and receive an IRS form 1099 at year-end. Qualification is determined solely on the last two years of your 1099 forms.
Loan Highlights
- Loan amounts to $3.5M
- Fixed and adjustable rate mortgages
- No tax returns or bank statements required
- Mortgage Insurance not required
- All occupancy types (Primary residence, second home or investment property)
Loan Requirements
- Must provide most recent 1 or 2 years of 1099’s
- Funds can be in checking, savings, money market accounts, marketable securities, or retirement accounts
- Credit scores down to 620 (Subject to loan amount and loan-to-value (LTV) restrictions)
- Debt-to-income ratio up to 55 allowed
12-Months Bank Statement Loans
Flexible documentation requirements, including no need for W2 and tax return submissions, allow your clients to stretch their finances by showcasing their business or personal income and invest with grace as they find their perfect balance in the realm of real estate.
Highlights:
- Min FICO 660
- Loan-to-value ratios up to 90%
- Maximum loan amounts up to $3MM
- Min. loan amounts as low as $125K
- 12 months business or personal bank statements
- Primary, second home, and investment properties
- Our team calculates income for you
- 30 yr. and 40 yr. interest-only available
2-1 & 1-0 Temporary Buydowns Available!
Foreign National Borrower Programs & Loans
What is a Foreign National Mortgage Loan?
A Foreign National Mortgage Loan is a mortgage loan product applicable to non-resident persons or citizens from another country who reside outside of the United States which allows them to purchase properties within the United States. These properties can become a second home or vacation home while staying in America. In many cases it could also be an investment property.
Foreign National: A foreign national must live and work outside the U.S. and cannot reside in the U.S.
Foreign National Borrower Programs
Financing for Diplomats or Foreign Nationals require specialized loans which are not offered by Fannie Mae, Freddie Mac, HUD, or VA. These programs are not offered by all banks or investors. The institutions which do offer these loans set their own guidelines.
Can a Foreign National purchase property in the US?
Yes. Foreign National loans allow this if borrowers meet the requirements to qualify and can document that they do.
Do applicants need a credit record in the US?
No, borrowers do not need to have a US credit record to qualify for a Foreign National loan.
What documents does a Foreign National borrower need to have ready?
Borrowers should get the following documents ready before they apply for a Foreign National loan in the US:
- A copy of their passport
- A copy of their unexpired Visa
- A current credit report
- Proof of income for the prior 2 years and the current year
- If self-employed, an accountant’s income letter for the prior 2 years and the current year
- A copy of their purchase contract
These documents should be translated into English by a certified translator. Having all these documents gathered before your clients fill out their applications can save you a great deal of time and hassle.
Are there restrictions on who cannot apply for a Foreign National loan?
Yes. The following borrowers are not eligible:
- Borrowers with diplomatic immunity or otherwise excluded from U.S. jurisdiction.
- Residents of any country not permitted to transact business with US companies are ineligible (as determined by any U.S. government authority).
- Irrevocable Trusts or Land Trusts.
- Borrowers less than 18 years old
Can clients close quickly on the property they want?
Yes, as an experienced lender accustomed to working with Foreign National borrowers we should be able to close this loan as quickly as a Conventional mortgage. And, because some of the income and credit qualifications are comparatively easier, it might happen even faster.
How high will their interest rate be?
Interest rates are dependent on a variety of factors, but borrowers can expect to have an interest rate that is competitive with those offered to US citizens.
- Maximum loans amounts of $2 Million
- Maximum loan to value ratio of 70%
- Passports only to qualify
- International credit from current financial institution
- Down payment and reserves must be in US banks
- Debt to income ratio of 50%
- Interest only option available
- 12 Month Bank Statement program available
- Full Documentation loans available
Diplomats
Diplomats can buy a house or any kind of real estate in the USA. Diplomatic immunity, as granted by the Vienna Convention on Diplomatic Relations, generally provides diplomats with immunity from the criminal and civil jurisdiction of the host country. However, this immunity does not extend to commercial transactions, such as buying real estate. Diplomats are therefore able to buy real estate in the same way as any other foreign national. Diplomats must sign a partial diplomatic immunity waiver.
- Maximum loan to value ratio of 70%
- Established credit in the US required
- Down payment and other related expenses must be in US banks
ITIN Loans
What is an ITIN?
An ITIN is a nine-digit number that the IRS issues to both resident and non-resident individuals who are not eligible to receive a Social Security Number (SSN) from the Social Security Administration but are required to have a US Taxpayer Identification Number.
What is an ITIN Loan Program?
It is as simple as it sounds. The ITIN loan program is a type of home loan available to those who do not have their social security numbers. It is beneficial for people who are not eligible for conventional loans. As already mentioned previously, those who do not possess an SSN (social security number) can apply to receive an ITIN card. If you are interested in applying for an ITIN mortgage plan, you will need to provide your ITIN number and other documentation to prove that you are eligible for this mortgage. The mortgage program for ITIN holders is not much different than other conventional loan programs.
What kind of property qualifies under the ITIN Loan program?
- Single Family Detached Homes
- Townhouses or Row Homes
- Condominiums
- (1-4) Unit Residential Properties
- Investment Properties
- Sometimes (second home property)