The non-QM sector continues to grow and with it, the steady stream of questions about what non-QM is and how it works. Deephaven has been setting records in non-QM month after month and many have asked about our success in a volatile market. In fact, Deephaven’s volume for non-QM hit an all-time record in March of 2024.
Deephaven’s leaders have joined other industry leaders on mortgage industry panels and our sales team travels coast to coast attending tradeshows. That too has prompted more questions.
We love the interest in non-QM and Deephaven! Given the vast number of questions coming our way, we are sharing the most frequently asked questions along with our answers. You are welcome!
We’ll start with the most common and obvious question of all:
What is a non-QM mortgage?
The answer lies in knowing what non-QM stands for: non-qualified mortgage. In simplest terms, it refers to a mortgage that does not conform with the federal mortgage lending guidelines established by the GSEs (government-sponsored enterprises), Fannie Mae, Freddie Mac and Federal Home Loan Banks. These loans can be a valuable offering for borrowers who do not meet Agency guidelines.
Why would a borrower need a non-QM mortgage?
There are many reasons why a borrower would need a non-QM mortgage. The most common scenarios include the following:
- A self-employed borrower who cannot qualify using a tax return, W-2 or traditional pay stubs. Many self-employed borrowers utilize tax strategies that do not align with Agency guidelines. A Bank Statement loan is an ideal solution where the income is verified using personal or business bank statements.
- The borrower might not fit the tight income, credit and/or down payment requirements set by the GSEs. Many borrowers just miss Agency guidelines and simply need a non-QM loan that has flexible requirements.
- Real estate investors might exceed the number of financed properties that Agency guidelines allow. Other reasons could be to avoid having to submit complicated documentation or meet the timeline for a 1031 Exchange transaction. A DSCR cash flow non-QM solution for real estate investors provides a quick and low hassle closing.
What is the profile of a non-QM borrower and how do they qualify for a non-QM mortgage?
In broad terms, the non-QM market is a vast population of underserved borrowers who are unable to qualify for a traditional mortgage. It is important to note that underserved does not mean underqualified. In fact, a large majority of non-QM borrowers have good to excellent credit, large down payments, and are buying higher-priced homes. They just need a loan that allows alternative documentation such as bank statements, 1099s, or profit and loss statements.
Here are common profiles of borrowers we help every day:
Self-Employed
According to the Bureau of Labor Statistics, there were 16 million self-employed workers in the U.S. as of January 2023. The U.S. Small Business Administration reports that there are 33 million small businesses across the country. Many of these potential non-QM borrowers won’t be able to purchase or refinance a home using their tax returns. A non-QM lender such as Deephaven Mortgage will accept a borrower’s personal or business bank statements to determine cash flow and loan affordability. Bank Statement loans are one of the most utilized loans at Deephaven due to the significant number of self-employed people out there who need them. The demand is there!
First-time Homebuyers
The National Association of Realtors recently issued a statistic stating that 43 million millennials are in the market for a house but can’t get a traditional mortgage because of a high DTI (debt-to-income) ratio. Additionally, first-time borrowers may not have been able to save 20% to put down on a new home. In both cases, a non-QM loan might be the solution for first-time homebuyers to achieve their dream. Non-QM mortgages allow for higher DTIs, up to 50%, while down payment requirements can be as low as 10%.
Real Estate Investors
A vast market of non-QM mortgage borrowers are real estate investors. In 2023, 27% of home purchases were investor transactions according to CoreLogic.
Another highly utilized non-QM mortgage product is our DSCR loan specifically for real estate investors. DSCR stands for Debt Service Coverage Ratio. Borrowers qualify on the cash flow or rental income on the subject property. This loan does not require traditional income analysis or employment information. Close one investment property for a real estate investor and expect more business to come as they grow their portfolio.
Borrowers With Credit Events
Homebuyers who have had a credit event within the past seven years may be eligible for a non-QM mortgage. Such events include a foreclosure, short sale, deed-in-lieu or bankruptcy. Certain non-QM products allow less than seven years seasoning out of particular credit events.
How do you choose the right non-QM lender?
In a word, experience. The mortgage industry is complicated and extremely sensitive to economic highs and lows. Non-QM lenders who have endured through years of market cycles have the know-how to manage pricing and risk. This is especially important for wholesale brokers and correspondent lenders whose business and borrower relationships depend on a stable non-QM partner they can count on for years to come.
In addition, most non-QM lenders tend to offer the same or similar array of products and loan terms. The real difference lies in non-QM mortgage underwriting. A provider with experienced, in-house non-QM underwriting has the latitude to be more flexible and to examine each application on its own merits. They will be more willing to work directly with originators and suggest strategies that will provide the best chances of loan approval with optimal terms.
Here’s a great question to ask yourself – how do you plan to grow your business further? The answer is increasing your offerings to serve all borrower types. Non-QM and Deephaven can help with that.
Are you ready to partner with us? Get started: https://deephavenmortgage.com/become-a-partner/
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