DSCR LOAN A Non-QM (Non-Qualified Mortgage) All Explained
What is a DSCR loan? A DSCR loan is a NON-QM (non-qualified mortgage) or non-QM is a loan for borrowers who cannot meet the guidelines of an Agency or a qualifying mortgage (QM). An example is a self-employed borrower who cannot qualify using their tax returns. They need an alternative solution such as a Bank Statement loan to qualify for a home loan.
What are the advantages of Non-QM features versus QM loan?
Non-QM must satisfy the ability to repay rule (ATR) just like a QM loan, but there are benefits to non-QM that do not apply to a QM loan. Non-QM can have loan terms that exceed 30 years or interest only payments.
- The caps on fees and points are maxed at 5% versus 3% for a QM loan.
- The standard DTI on a primary or a second home is 40/50, whereas the DTI on a QM loan can vary.
Self-employed borrowers can qualify submitting bank statements from a personal or business account in lieu of tax returns. Agency or QM loans do not allow bank statement submissions. A huge benefit for real estate investors is that non-QM does not have a limit on the number of non-owner occupied (NOO) properties a borrower can own. As well, non-QM allows NOO properties to close in an LLC while a QM loan does not allow this benefit.
How do non-QM products help borrowers who cannot qualify for a QM loan?
There are many instances of how non QM can help borrowers or save a deal from a fall-out situation. Here are the most common scenarios:
Bank Statement (Personal or Business): Help self-employed borrowers qualify bypassing income on their cash flow and liquid assets since their tax returns and W-2s of pay stubs alone may not be reflective of their ability to repay.
Non-QM home loans offer an opportunity for borrowers with unique financial circumstances to obtain a mortgage. These types of loans do not require the same stringent qualifications as traditional mortgages, and instead use bank statements to verify income and assets. This means that self-employed individuals, freelancers, retirees, those on disability or Social Security income can all use their bank statements to qualify for a loan. Additionally, such loans often require less paperwork than traditional mortgages and are often more flexible with regard to credit score requirements and down payment amounts. Non-QM home loans can be used for either primary residences or investment properties, making them an attractive option for those looking to purchase a home but may have difficulty qualifying through traditional methods.
Investor -Debt Service Cover Ratio (DSCR): Helps borrowers qualify based on rental analysis to determine property cash flow versus income and debts.
Debt Service Coverage Ratio (DSCR) loans are a type of mortgage used by real estate investors to purchase property without having to show proof of income. These loans are based on the cash flow generated from an investment property and not on the borrower’s income, making them an attractive option for those looking to invest in real estate. DSCR loans offer several advantages, including no tax returns or debt-to-income ratio calculations required, and no employment verification needed. Additionally, they can provide access to higher loan amounts than traditional mortgages and can be used for properties such as Airbnbs. With all these benefits, it is no surprise that DSCR loans have become increasingly popular among real estate investors.
Just Missed: Helps well-qualified borrowers whose credit profile falls just outside of today’s tight and inflexible lending standard.
Life/Credit Event: Helps a borrower that was affected by a negative life or credit event (e.g., bankruptcy, foreclosure, short sale, loss of job, divorce, medical issues, recent mortgage rates).
No Income/High Assets: Allows borrowers to qualify for loans using their liquid assets and does not require employment or debt to income to justify the ability to repay. For borrowers who have enough assets to buy the home outright, but don’t want to liquidate their assets to do so.
