What is Non-QM? A Guide to Self Employed Borrowers

What are Non-QM or Non-Conventional Mortgages?

Are you a business owner or a self employed person looking to get a mortgage? Have you been writing off and deducting expenses when it comes tax time? Writing off your expenses is something you should definitely be doing to lower your tax liability. However, when it comes time to getting approved for a mortgage, these write offs often hurt your loan approval amount. What is the best way to get around this? Non-Qualifying Mortgage. Non-QM is a non-conventional mortgage program that allows for self employed or business owners to count their full income by using alternative methods of income calculation. These income calculation methods vary on the program and do not require the use of any tax returns. As with all mortgage programs, the lender will need to see an established history of the business and typically the business needs to be incorporated for at least 2 years.

The specific Non-QM programs vary based on the income calculation method you as the borrower choose to forego. So what are the popular programs for Non-QM? 1. Bank Statement Program: The bank statement program calculates income based on your business bank statements for the last 12 or 24 months. The income is calculated by taking a percentage of the monthly deposits. The exact percentage will vary but it is based on a pre-determined expense ratio. For example, you own a retail store with around $500,000 in annual deposits; every month you average around $42,000 in deposits; with a 50% expense ratio, your monthly income would be $21,000. 2. Profit-and-Loss Statement: The Profit-and-Loss Statement is an incredibly simple program which requires an accountant to evaluate your business activity for the year. From that, they can draft a P&L statement which will show the revenues, the expenses, and the net income for the year. Once the lender receives the verified P&L, they can use that net income divided by 12 as the monthly income. 3. 1099 Program: The IRS Form 1099 is used when you receive any income from an individual or business that isn't your employer. The income is calculated off of the gross income from the 1099 form, minus a pre-determined expense ratio, and then divided by 12 to get the monthly income. This expense ratio is typically much lower than the expense ratio.

It is important to note that Non-QM programs are riskier loans for a lender to fund. Therefore, the interest rate and loan-to-value requirements are typically higher than the conventional counterparts. That said, there generally isn't any mortgage insurance on these mortgages either. It's also crucial to note that this is a over simplified guide to Non-QM. You should work with a lender that understands the nuances of each program to determine which fits your scenario the best.