8 Advantages of Non-QM Loans/Lenders to Conventional Mortgages

[Herndon Davis]

For those who are capped and constrained by all of the Conventional Fannie Mae/Freddie Mac rules on investment real estate lending, you should give the Non-QM (Non-Qualified Mortgage) world a try. I've detailed below both the advantages and disadvantages of Non-QM loans/lenders. Please let me know if you have any questions, I'd be happy to follow-up! 

WHAT ARE NON-QM (NON-QUALIFIED MORTGAGE Lenders/Loans?

Non-QM (non-Qualified Mortgage) lenders are non-bank depository lenders. They are corporations that are NOT regulated by traditional Fannie Mae/Freddie Mac guidelines. They are focused on business real estate investors whose needs have outgrown the Conventional lending market. In the Non-QM world, we do NOT calculate personal DTI (Debt Ratio) or look at personal taxes, or even look at personal income. You can be unemployed with no W-2 income and not filed taxes and still qualify for a Non-QM loan!!

Why???

Non-QM lenders are asset based while Conventional lenders are credit based.

Non-QM lenders focused solely on the following criteria when green lighting your deal:

1-The ability of the property to cash-flow in terms of covering its underlining debt; or its ability ti appraise with ARV that covers the debt if you are flipping.

2-The credit of the borrower (660 or higher, preferably above 700)

3- Your liquidity (do you have 3-6 months of liquid assets) after you close on the property.

That's it!!

8 ADVANTAGES of NON-QM Loans/Lenders
1-Can make loans to legal entities (i.e. LLC, Corp etc.), Family Trusts etc.
2-Can consolidate various mortgages into ONE portfolio loan
3- No mortgage Insurance
4-Will loan on BOTH Commercial Residential (5+ units) and Commercial Business (retail, office, warehouse etc)
5-Loan Amounts range from $45K minimum (residential) to maximum $5M (Commercial).
6-Do NOT need a job, income to apply.
7-No limit on the number of mortgages you can have
8-In some instances can cross collateralize property

4 DISADVANTAGES of NON-QM Loans/Lenders
1- 20% down payment
2-Typically 2 pts lender fees or more
3- Slightly higher interest rate if your credit is below 700 or the the property DSCR (debt service coverage ratio) is below 1.3.
4- Show 3-6 months liquidity left over after you close on the property

[Chris Mason]

Originally posted by @Shane Ward:

I am working on closing three of these types of loans today. So far I'm not thrilled with the negatives out weighing the positives so far. (1) Lots of fees as (2) my loan was passed off three times before I knew what was going on. There are brokerage and origination fees averaging about $7500 on each loan. The interest rate is also based on the size of the loan. Under 100k matters. I ultimately decided to buy down points as I can cliam that expense as a loss. i am still cash flowing over $400 per unit with these loans so I'm going with it. 

(1) Yup, no subsidy from Fannie Mae. This is purely private sector and free market. Anyone can plunk money in a Wall Street index fund and earn a certain ROI. If they can't beat that expected ROI with the rate/fees they are charging you, they simply won't lend you the money, they will park it on Wall Street.

(2) Typically the underwriter with Lender A has 200 pages of guidelines for that particular non-qm program. And they typically give the loan originator a 2-5 page "summary." Kind of hard to play a game if you don't know the full rule book. Your LO was acting in good faith as best they could with 195 out of 200 pages of guidelines hidden from them, when something on page 133 of 200 of Lender A's secret rule book disqualifies your loan application, they move it to Lender B. A big "con" I would add to OP's otherwise solid pro/con list is service levels and speed are both very weak in the non-qm world. 

Because of #2, I stopped offering non-qm on purchase mortgages. Refi only and past client only. My market moves to fast to muck about with slow turntimes, over-conditioning, and in general all the nonsense, of non-qm. I can quite literally close 3 Fannie loans in the same amount of time/work as it takes to close 1 non-qm, and I also get 3 happy past clients v 1 unhappy past client, so it's bad for karma to boot. Maybe in a year or two I'll give it another shot, to see if they've gotten their act together enough to play ball in the Bay Area purchase market.

If OP has developed expertise in this area, maybe you'd have a better experience with him as your LO, but your experience honestly is typical from what I've seen with both myself and a bunch of colleagues that have tried to "party like it's 2007" and treat non-qm like subprime.