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Investor and self-employed

Non-QM is the loan for a borrower who can repay but whose file does not fit agency rules

A non-QM loan is a mortgage that falls outside the definition of a qualified mortgage, which the Consumer Financial Protection Bureau sets under Regulation Z, so the lender keeps the loan on its own books or sells it to private investors rather than to Fannie Mae or Freddie Mac. In California that is the loan for a borrower whose income is real but is documented by bank statements or assets rather than tax returns, whose bankruptcy or foreclosure is more recent than agency rules allow, whose debts run above agency limits, or whose property the agencies will not take. The lender still has to verify that you can repay it. What changes is how, not whether, and it can cost more than a conventional loan.

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The program in one box

What it is
A mortgage outside the definition of a qualified mortgage that the CFPB sets under Regulation Z. The lender keeps it or sells it to private investors rather than to Fannie Mae or Freddie Mac.
Who it suits
A borrower who can show the ability to repay in a way agency rules do not accept: bank statements or assets instead of tax returns, a credit event more recent than agency rules allow, debts above agency limits, a foreign national, an ITIN borrower the agencies' residency rules do not reach, or a property the agencies will not take.
How it is qualified
On each lender's own guidelines, with your ability to repay verified from third-party records.
The ability-to-repay rule
A federal rule that applies to a loan on a home you live in, non-QM included. A business-purpose loan on a rental you do not live in sits outside it; that is the DSCR loan, not this one.
The property
A home you live in or a second home, and property types the agencies decline, such as a condominium project they will not approve. Each lender draws its own line, and a rental qualified on its own rent is the DSCR loan instead.
What it costs
It can cost more than a conventional loan, with the rate, any points and the reserves set by each lender. On a non-QM loan for a home you live in, the federal rule bars a prepayment penalty; a DSCR loan can carry one.
Refinancing later
Possibly into an agency loan, if the file qualifies once the reason it was non-QM has aged out: tax returns that now show the income, or a credit event that has cleared the agency waiting period.
Where it is not the answer
A file that fits agency rules: returns that show the income, a credit history past the agency waiting periods, an ordinary property. Then a conventional or FHA loan costs less.

What this program is good at

  • Bank statements, assets, a recent credit event, a foreign national's file, an unusual property: each is a reason agency rules say no, and a non-QM lender applies its own guidelines instead. We arrange non-QM loans for each of these reasons.
  • The lender still verifies that you can repay. That protects you as much as it binds them, and it is what makes a non-QM loan a mortgage rather than a bet.
  • On a non-QM loan for a home you live in, the federal rule bars a prepayment penalty, so leaving it for an agency loan later carries no penalty.
  • It can be a stepping stone: once the reason has aged out, the file may qualify to refinance into a conventional loan. That is a second loan with its own closing costs, not a free exit.
  • Every non-QM lender writes its own guidelines and covers some reasons but not others, so one lender's decline is that lender's rule.

Who qualifies

What a lender weighs before this program is on the table. A lender can add rules of its own, and those rules can differ from one lender to the next.

The definition that makes a loan non-QM

A qualified mortgage is a category the CFPB defines under Regulation Z. To meet the general definition, a loan has to avoid certain features (interest-only payments, negative amortization, a balloon payment), keep its term and its points and fees inside set limits, price within a set spread of comparable loans, and be underwritten with your income and debts considered and verified. A lender that makes one gets legal protection on the ability-to-repay rule. A loan that misses any part of that, and fits none of the narrower categories the rule sets out for certain smaller lenders and seasoned loans, is non-QM, and the lender does without the protection.

You still have to show you can repay

A non-QM loan on a home you live in is covered by the same federal ability-to-repay rule as a conventional or FHA loan. The lender has to make a reasonable, good-faith determination that you can repay it, from third-party records, and the rule itself lists bank records among the ways income can be verified.

Reasons a file can be non-QM

Income that is real but documented by bank statements or assets rather than tax returns. A bankruptcy, foreclosure or short sale more recent than agency waiting periods allow. Debts that run above agency limits against your income. A loan with interest-only payments. A foreign national, or a borrower who files taxes with an ITIN and whose file the agencies' residency rules do not reach. A property type the agencies will not take. Each is a different lender and a different conversation, which is why the reason matters more than the label.

Investor loans are a different case

A loan on a rental you do not live in, made for a business purpose, is outside Regulation Z altogether rather than on the wrong side of the qualified-mortgage line. That is the DSCR loan, qualified on the property's rent, and it can carry a prepayment penalty where a non-QM loan on your own home cannot. The rules treat the two differently, and the difference shows up in what you sign.

Where it is not the answer

A file that fits agency rules. If your tax returns show the income, your credit history clears the agency waiting periods and the property is ordinary, a conventional or FHA loan costs less for the same work. Self-employed income with returns that show it is normal conventional work, not a reason to go non-QM.

How it works with us

What happens once you get in touch

The steps in order, so you can see what is coming. Nothing here is underwritten until a lender underwrites it.

  1. Tell us why the file is non-QM

    The reason decides the lender. Tell us what the agency route would trip on: how the income is documented, a credit event and when it happened, the debts, the property. No credit pull to have that conversation.

  2. Your loan officer reviews the file

    After the call, if the file supports one, your loan officer can write a pre-qualification letter.

  3. Underwriting and funding

    The lender verifies your ability to repay from third-party records before it decides whether to fund the loan.

What people ask about this program

If yours is not here, call us. The useful answer depends on your file.

What is a non-QM loan?

A non-QM loan is a mortgage that does not meet the definition of a qualified mortgage, which the CFPB sets under Regulation Z. A qualified mortgage has to avoid certain features such as interest-only payments, keep its points and fees and its term inside set limits, and be underwritten with income and debts verified, and a lender that makes one gets legal protection on the ability-to-repay rule. A loan outside that definition is kept by the lender or sold to private investors rather than to Fannie Mae or Freddie Mac, and it can cost more than a conventional loan.

Does a non-QM lender check my income?

Yes. The federal ability-to-repay rule applies to a non-QM loan on a home you live in just as it does to a conventional or FHA loan, so the lender has to verify from third-party records that you can repay it. What changes is how that income is documented: bank statements or assets can stand in for tax returns, because the rule lists bank records among the acceptable ways to verify income. A lender that does not ask how you will repay is not making a non-QM loan; it is making a loan you should walk away from.

Is a non-QM loan more expensive than a conventional loan?

It can. The lender gives up the legal protection a qualified mortgage carries and cannot sell the loan to Fannie Mae or Freddie Mac, and it sets its own rate, any points and its own reserve rules. How much more depends on the reason the file is non-QM and on the lender. A borrower can refinance into an agency loan later, once the reason has aged out, which is when the higher cost can end; the refinance has its own closing costs.

Can I get a mortgage in California after a recent bankruptcy or foreclosure?

Sometimes, yes. Fannie Mae, Freddie Mac and FHA each set a waiting period after a bankruptcy, foreclosure or short sale, and a file inside that window cannot go the agency route. A non-QM lender sets its own waiting period and its own rules on what has happened since. It can cost more than an agency loan, and once the agency waiting period has passed, a refinance into one may be possible.

Is a DSCR loan a non-QM loan?

Not under the rules, whatever the label. A DSCR loan is a business-purpose loan on a rental the borrower does not live in, qualified on the property's rent, and a business-purpose loan is outside Regulation Z altogether, including the ability-to-repay rule and the qualified-mortgage definition. A non-QM loan on a home you live in sits inside that rule and outside that definition, which is why it cannot carry a prepayment penalty while a DSCR loan can. The label is shared; the protections are not.

Investor and self-employed

Bank statement loan

Income read from your bank deposits instead of your tax returns, for the self-employed whose returns understate what they take home.

  • Your deposits are what the lender reads, rather than the figure left on the return after every legitimate write-off has been taken.
  • It is a loan on the home you live in, with the same federal ability-to-repay protection as any other consumer mortgage.
  • Federal rules do not permit a prepayment penalty on a loan like this written outside the qualified-mortgage definition, so if a cleaner return later qualifies you for a conventional loan, you could refinance without a penalty for leaving, though the refinance has closing costs of its own.
More about Bank statement

Investor and self-employed

DSCR loan

Qualified on the rental's rent rather than your tax returns. A business-purpose loan for an investor, priced like one.

  • The rent qualifies the loan, so a rental that carries itself can be bought or refinanced without reopening your tax returns, your business's returns or the entities behind them.
  • A purchase or a refinance, including cash out of a rental you already own, which is how one property's equity becomes the next property's purchase.
  • The loan can be made to an LLC that holds the property.
More about DSCR

Investor and self-employed

ITIN loan

For a taxpayer who files under an ITIN rather than a Social Security number. A lender-held loan that can buy the home you live in.

  • It is a real mortgage on a home you will live in. FHA requires a valid Social Security number from each borrower, with narrow exceptions, and this loan is written for a borrower without one.
  • The returns you have filed under your ITIN are how a lender reads your income, alongside pay records or bank statements, so the years of filing carry the file rather than needing to be explained away.
  • Credit history counts, and where the bureau file is thin, federal rules let a lender read a history of rent and utility payments, though none is required to.
More about ITIN

Where this program fits:Buying a homeRefinancingThe county's loan limitsThe Central CoastServices

Published by

California Mortgage Solutions Inc. · Company NMLS #325189

This page is general information about a loan program, not an offer of credit or a commitment to lend. What a lender will do with your file depends on the file.

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