Non-QM Loans: Mortgages for Borrowers Who Don't Fit the Box

Non-QM (Non-Qualified Mortgage) loans serve borrowers who don’t fit traditional lending guidelines. These include bank statement loans for self-employed borrowers, DSCR loans for investors, asset-based loans for high-net-worth individuals and recent credit event loans. Rates are 1-3% higher than conventional loans with larger down payments (10-25%), but they provide financing options when banks say no. Non-QM doesn’t mean subprime—many borrowers are financially strong but have non-traditional documentation.

What Are Non-QM Loans?

The QM vs Non-QM Distinction

Qualified Mortgage (QM):

• Meets CFPB ability-to-repay rules
• Standard documentation requirements
• DTI limits (typically 43%)
• No risky features (interest-only, balloons)
• Sold to Fannie Mae/Freddie Mac

Non-Qualified Mortgage (Non-QM):

• Doesn’t meet all QM standards
• Alternative documentation accepted
• Flexible DTI guidelines
• May have non-standard features
• Held by lenders or sold to private investors

Who Non-QM Serves

Self-employed borrowers:

• Tax returns don’t reflect true income
• Heavy write-offs reduce qualifying income
• Bank statements show real cash flow

Real estate investors:

• Property income qualifies the loan
• No personal income verification needed
• Portfolio expansion without DTI limits

High-net-worth individuals:

• Significant assets, limited income
• Asset-based qualification
• Non-traditional income sources

Recent credit events:

• Bankruptcy or foreclosure within waiting period
• Can still qualify with explanation
• Shorter waiting periods than QM

Foreign nationals:

• No U.S. credit history
• Alternative documentation
• Investment properties

Types of Non-QM Loans

Bank Statement Loans

How they work:

• 12-24 months of bank statements
• Income calculated from deposits
• No tax returns required
• For self-employed borrowers

Calculation example:

• Average monthly deposits: $35,000
• Expense ratio applied: 50%
• Qualifying income: $17,500/month

Requirements:

• 12-24 months bank statements
• 620-680+ credit score
• 10-20% down payment
• Rates: 1-2% above conventional

DSCR Loans (Debt Service Coverage Ratio)

How they work:

• Qualify on property income, not personal income
• DSCR = Rental income ÷ Property expenses
• No employment or income verification
• For investment properties only

DSCR calculation:

• Monthly rent: $2,500
• Monthly PITI: $2,000
• DSCR: 1.25 (acceptable)

Requirements:

• DSCR of 1.0-1.25 minimum
• 660+ credit score
• 20-25% down payment
• Rates: 1-2% above conventional

Asset-Based Loans

How they work:

• Qualify based on liquid assets
• Assets converted to “income” for qualification
• No employment verification
• For high-net-worth borrowers

Calculation example:

• Liquid assets: $2,000,000
• Divided by 60 months = $33,333/month income

Requirements:

• Significant liquid assets
• 700+ credit score typically
• 20-30% down payment
• Rates: 1-2% above conventional

1099 Income Loans

How they work:

• Use 1099 forms to document income
• 1-2 years of 1099s
• For contractors and gig workers

Requirements:

• 12-24 months of 1099s
• Bank statements may supplement
• 640+ credit score
• 10-20% down payment

Recent Credit Event Loans

How they work:

• Shorter waiting periods after bankruptcy/foreclosure
• Explanation and documentation required
• Higher rates and down payments

Waiting periods:

• Bankruptcy: 1-2 years (vs 2-4 for QM)
• Foreclosure: 1-3 years (vs 3-7 for QM)
• Short sale: 1-2 years (vs 2-4 for QM)

Interest-Only Non-QM

How they work:

• Pay only interest initially
• Principal payments begin later
• For investors or those expecting income changes

Terms:

• 5-10 year interest-only period
• Then fully amortizing
• Higher payment after IO period

Foreign National Loans

How they work:

• No SSN or U.S. credit required
• Alternative ID and documentation
• For investment properties typically

Requirements:

• Valid passport
• U.S. bank account
• 30-40% down payment
• Higher rates (7-10%+)

Non-QM Requirements

Credit Score Minimums

Loan Type	Typical Minimum
Bank statement	620-680
DSCR	660-680
Asset-based	700
1099 income	640
Recent credit event	620-660
Foreign national	680+ (if applicable)

Down Payment Requirements

Loan Type	Typical Down Payment
Bank statement	10-20%
DSCR	20-25%
Asset-based	20-30%
1099 income	10-20%
Recent credit event	15-25%
Foreign national	30-40%

Interest Rate Premiums

Non-QM rates run higher than conventional:

Loan Type	Rate Premium
Bank statement	+1-2%
DSCR	+1-2%
Asset-based	+1-2%
Recent credit event	+2-3%
Foreign national	+2-4%

Bank Statement Loans in Detail

How Deposits Are Calculated

Personal bank statements:

• Average monthly deposits
• Expense factor: 50% (typical)
• Resulting income used for qualification

Business bank statements:

• Average monthly deposits
• Expense factor: 50-70% (varies by business type)
• May require CPA letter

Required Documentation

• 12 or 24 months of statements
• All pages of all statements
• CPA letter (sometimes)
• Profit and loss statement (sometimes)
• Business license

Who Benefits Most

Ideal candidates:

• Self-employed 2+ years
• Strong bank deposits
• Tax returns show low income due to write-offs
• Can document consistent cash flow

Bank Statement Loan Example

Borrower profile:

• Self-employed consultant
• Tax returns show $80,000 net income
• Bank deposits average $25,000/month
• Wants to buy $500,000 home

Traditional qualification:

• Monthly income: $6,667 (from tax returns)
• Maximum home: ~$300,000

Bank statement qualification:

• Monthly deposits: $25,000
• After 50% expense factor: $12,500/month
• Maximum home: ~$550,000

DSCR Loans in Detail

How DSCR Works

Formula: DSCR = Monthly rental income ÷ Monthly PITI

Example:

• Rental income: $3,000/month
• PITI (principal, interest, taxes, insurance): $2,400
• DSCR: 3,000 ÷ 2,400 = 1.25

Minimum DSCR Requirements

DSCR	Availability
1.25+	Best rates, most lenders
1.0-1.24	Available, higher rates
0.75-0.99	Limited, premium rates
Below 0.75	Very difficult

What’s Not Required

No verification of:

• Personal income
• Employment
• Tax returns
• Personal DTI

Best Candidates for DSCR

• Experienced real estate investors
• Those with multiple properties
• High personal DTI
• Self-employed investors
• Anyone wanting to scale without income limits

Non-QM vs Conventional Comparison

Side by Side

Factor	Conventional	Non-QM
Documentation	Full	Alternative
Rates	Lower	1-3% higher
Down payment	3-20%	10-40%
Credit score	620+	620-700+
DTI	43-45% max	Flexible
Approval time	30-45 days	2-4 weeks
Lender options	Many	Limited

When Non-QM Makes Sense

Worth the higher cost if:

• Can’t qualify conventionally at all
• Time-sensitive opportunity
• Investment returns exceed rate premium
• Building toward conventional refinance later

Not worth it if:

• You can wait and qualify conventionally
• Rate difference significantly impacts cash flow
• Better alternatives exist

Finding Non-QM Lenders

Where to Look

Mortgage brokers:

• Access to multiple non-QM lenders
• Know which lenders fit which situations
• Can compare options

Non-QM specialists:

• Companies focused on non-QM
• Deep expertise
• May have proprietary products

Private lenders:

• For unique situations
• Higher rates but more flexibility
• Last resort often

Questions to Ask

1. What non-QM products do you offer?
2. What are your credit score minimums?
3. What’s the rate and APR?
4. What down payment is required?
5. What documentation do you need?
6. How long is your typical closing time?

The Non-QM Process

Step 1: Determine Best Program

• Bank statement for self-employed
• DSCR for investors
• Asset-based for high-net-worth
• Match your situation to product

Step 2: Gather Documentation

Varies by program:

• Bank statements (12-24 months)
• Asset statements
• Lease agreements (DSCR)
• Business documentation

Step 3: Apply and Underwrite

• Submit application
• Provide documentation
• Underwriter reviews
• May request additional items

Step 4: Appraisal and Approval

• Property appraisal ordered
• Rental analysis (for DSCR)
• Final approval issued

Step 5: Close

• Sign documents
• Fund the loan
• Often faster than conventional

Frequently Asked Questions

Is Non-QM the same as subprime?

No. Non-QM means the loan doesn’t meet Qualified Mortgage standards, often due to documentation rather than credit risk. Many non-QM borrowers have excellent credit and significant assets—they just don’t fit the traditional box.

Are Non-QM loans risky?

They carry different risks: higher rates increase payment, and non-standard documentation may mean less verification. However, for appropriate borrowers, they’re a valid tool. The key is understanding the terms and costs.

What credit score do I need for Non-QM?

Depends on the specific product. Bank statement loans often require 620-680. DSCR loans typically require 660-680. Asset-based may require 700+. These are higher than FHA minimums but may be lower than what you need to qualify conventionally.

How much more expensive is Non-QM?

Expect rates 1-3% higher than conventional loans. On a $400,000 loan, that’s $200-$600 more per month. Down payments are also higher (10-25%+ vs 3-20%).

Can I refinance out of a Non-QM loan?

Yes. Many borrowers use non-QM as a bridge, then refinance to conventional when they can document income traditionally or after credit events age sufficiently.

Are Non-QM loans harder to get?

In some ways, easier (flexible documentation), in others, harder (higher down payment, higher rates, fewer lenders). It depends on your specific situation.

Who offers Non-QM loans?

Specialized non-QM lenders, some banks and credit unions, and mortgage brokers with access to wholesale non-QM options. They’re not as widely available as conventional loans.