Alternate Loan Programs

Contractor with Tools

If you’re self-employed or a contractor, maybe you have inconsistent seasonal income or had some major financial issues recently. Keep listening. This episode is for you.

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We’ll focus on the following alternate (Non QM) loans:

  1. Jumbo Loans
  2. Bank Statement Loan
  3. ITIN Loan
  4. Interest-Only Home Loans
  5. Bad Credit (Post BK)

Who they are for, and some general qualifications. 
Our Guest today is Sarah Krasner.
Sarah’s Contact Info:
Sarah Krasner: (702) 466-6430
NMLS #1272407

We’re going to break down five different types of non-standard loans: jumbo loans, bank statement loans, ITIN, interest-only loans, and ones where we’ve had bad credit recently. We’re going to jump into each one and give an idea of what that loan is, who it can help, and the general qualifications for each.

So if you’re self-employed or a contractor, or maybe you have inconsistent seasonal income or have had some major financial issues recently, keep reading: this one’s for you.

What is a non-standard loan?

First, let’s get something straight: what is a non-standard loan? They’re often referred to as ‘Non-QM,’ which stands for non-qualified mortgage. This is a non-conventional loan that helps different buyers be able to obtain financing. They’re for people who wouldn’t qualify for, or who don’t fit into, that standard bucket that you would get with those government-type backed loans like FHA or VA (check out our recent posts for more information about these loans).

With these loans, they’re very cookie cutter; you have to meet certain qualifications. Like anything, Non-QM does have some of those, but they’re a little bit more lenient. So, let’s say that you’ve owned your own business but you tend to write off a lot on your taxes.

Jumbo loans

Good for: big purchases and good credit

These are gonna be for larger purchases, and then your standards. A jumbo loan is required when the property does not fit into conforming limits. Every year we do increases (or even decreases) in what would be considered conventional financing. The conventional limit right now for 2023 is $726,200; so, any loan limit above that would be considered a jumbo. For example, if you were trying to come in with an FHA or conventional loan, and it was an $800,000 or $900,000 house, you’d have to come in with a much larger down payment in order to make up the difference.

But does a jumbo loan have a lot stricter requirements than your normal, conventional loan? It depends. There are several different types of jumbo loans that you can get. Typically, you need to have higher credit quality than your typical FHA, VA, or even USDA. You’d also have to be able to fit within some of the income guidelines, as well as show proof that you can make the payments on that higher loan amount.

Even though a jumbo loan is a higher dollar amount–and it’s not government-backed–it doesn’t necessarily mean that it’s going to have a higher interest rate or even that much stricter requirements from credit. In fact, recently we’re seeing lower interest rates with jumbo loans than with conforming loans. But keep in mind, you do still have to qualify for that higher dollar amount.

You may be wondering: in higher cost-of-living areas, is a jumbo loan always required? Not really, because with higher cost-of-living areas, you can go up to over $900,000 for your loan amount. If you’re putting traditionally 5% down on a conventional, or 3.5% down on an FHA, you’re going to be able to make those conforming guidelines. If you’re in San Diego, Orange County, or LA, for example, a lot of those pretty much have a $1,000,000 limit because they’re a higher cost-of-living area. So you may not need to have a jumbo loan.

Bank Statement Loan

Good for: self-employed individuals, contractors

This is probably one of our favorite – and most popular – of these Non-QM loans. The bank statement loan is going to be best for anyone who is self-employed, who has an account that they deposit money into.

Some lenders have a six-month requirement, some are 12, and some are 24-month. With the bank statements, they all have to be from the same account. So you can’t mix a business account with a personal account. The same would apply to a person who two business accounts for the same business or deposits into multiple accounts. You have to choose the account that has the most deposits and, ideally, the least withdrawals, and submit that one to your lender.

We see this a lot with self-employed people or contractors who don’t get a W-2, such as chefs who own their own restaurants or even real estate agents. Or maybe you’ve got a side gig that actually brings in a lot of money, but you haven’t been doing that steadily for two, three years, in which case standard financing might not look at that as consistent income.

With a bank statement loan, there’s usually less paperwork involved because it’s pretty simplified as far as the documentation that you need. However, you are going to see a higher interset rate because, to a bank, a bank statement loan is a higher-risk loan. For those that wouldn’t normally fit into the conventional boxes of traditional financing, this is a very great opportunity for people to be able to purchase. Whereas a company owner would need two years of steady, documented income in order to qualify for a loan, a bank statement loan could be as little as six or 12 months as long as that income was coming in consistently.

If you have a really good contract job, you’re doing a lot of contract work, or you’re self-employed and you’ve got that consistent income coming in, you don’t have to wait that two years that you thought you’d have to; you might be able to get it after just six or 12 months. Again, as long as it’s consistent and in that one account…and you’re not withdrawing every single dollar from it.

ITIN loan

Good for: people working in the U.S. who have an ITIN instead of a standard Social Security number

Even if you don’t have a standard Social Security number, there are still programs available to you when using your ITIN. With that, you have a little bight higher of a down payment than a traditional, conventional, or FHA loan; it’s typically anywhere as low as 5%, but typically it’s 10-20% down. Additionally, it’s typically primary residences only. To become a borrower in this way, you would need paycheck stubs to prove that you work and the social on these paycheck stubs need to match with what your ITIN shows. Many borrows in this situation also file taxes using their ITIN; so as long as you have that documentation, you’re good to go.

This is fairly straightforward. The biggest difference is that it can’t be a government-backed loan if you’re not using a Social Security number. So if it’s ITIN, it follows this slightly different process. It does have a little bit higher of a down payment, but it allows someone who is working in the U.S., paying and filing their taxes, and who wants to buy a home the ability to do so.

Interest-only loan

Good for for: …well, it depends

Typically investors are the ones looking for interest-only loans; however, because interest rates are higher right now, it is possible to do 40-year loans that are interest-only. Is that always the best idea? Well, no, it doesn’t work for every borrower, but it’s still another great alternative way to get buyers in.

Interest-only loans can be done for investors or priary residences. Again, they come with a little bit higher risk, so a lender is going to want to see all of the traditional items still, but it’s a great loan to have in your back pocket.

Besides investors, even first-time home buyers can benefit from an interest-only home loan. So what would someone normally do after getting an interest-only loan if they’re not an investor? Would you refinance after a certain amount of time to a 30-year? It’s a good idea to stay in contact with your loan officer, because a good loan officer will let you know when rates go lower. At this point, you may want to sell or you may want to refinance into that traditional 30-year fixed later on, depending on what rates do. No one has a crystal ball, but are rates are trending lower…and that is great news.

Interest-only home loans are a great way to get someone who might have been priced out from an interest rate standpoint despite being qualified previously. It allows them to get in, and as rates go down your loan officer will be able to help you get that refinancing when it makes the most sense.

Recovering from a credit issue

Good for: those with recent credit and/or bankruptcy issues

This is for those folks that might have recently had a major credit issue. Or maybe if you filed for bankruptcy 12 to 18 months ago, in which case you’d normally have to wait at least two years. You’d definitely have a higher interest rate, and you’d need to provide a really good letter of explanation, but this gives you the opportunity to get into that home now.

A loan like this is for people who would be able to have a higher down payment, since one would be required for something like this that would be considered a riskier loan. For that borrower that just had some unfortunate credit circumstance, these loans would be great for you. This just goes to show that there are indeed options for folks that have high income and have been able to save for a good size down payment, but who’ve also had major credit issues that have been keeping them from getting approved for and using the standard type loans.

Now that we’re familiar with these different types of loans, let’s go over how to get one.

Basic loan requirements

These are the types of loans and types of programs that are available to help you in your current credit situation. There are definitely positives and negativies to each of these loan types, but talking about your situation with your loan officer is going to be the best bet for you.

A crucial aspect of this conversation between you and your loan officer would be the different credit and/or income requirements needed for the type of loan you’ve determined to be most well-suited to your needs. Each loan has different requirements but typically you’ll want to have at least a 640 FICO score. Depending on other factors, you may be able to scrape by with a 620 score, but nothing lower than that at this time. You’re going to want to show proof of income via bank states, tax returns, pay stubs, or a combination. Obviously, you’re always going to need to have money in the bank to prove down payment and, no, you can’t just use cash under the table or dip into what’s hidden in your mattress. You’ve got to be able to show seasoned funds.

A lot of these do have slightly higher credit requirements than a government-backed loans because they are considered higher risk. Regardless, they are still doable.

Advantages and disadvantages

It goes without saying that there are potential advantages and disadvantages to each loan type. If a particular borrower really wasn’t in the financial situation that they has communicated to the loan officer, it could cause them to lose out in foreclosure later on if they’re not able to make the payments on time. That would be a major disadvantage.

Other disadvantages could be that it’s a higher down payment, the interest rates may be higher, and the type of documentation may be a little more in depth.

However, the advantages mostly outweigh the disadvantages in the sense that you’re able to get into your own home and start building your own wealth through real estate, as well as being able to secure your own place. And with most of these programs, there are ways for you to stay on track. You’ll want to keep in touch with your loan officer, and you’ll also want to keep an eye on those interest rates because after you get through your credit, you’ve been building equity in your home. At that point, you’re gonna be able to refinance into a more standard loan that may have some better terms for you.

To sum it all up…

The Non-QM alternate types of loans are a really great option for those that don’t meet the criteria for a standard loan, such as someone who is self-employed, not a U.S. citizen, or recovering from a financial hardship that has disqualified you from the standard loan types. The Non-QM loan types offer a variety of options with a lot of different qualification types, so you can still benefit if you’re looking for something like that but don’t meet the standard criteria.

These loans have unique features and benefits, so you’ll want to make sure that you’re talking to a professional who has experience working with these and who has a comprehensive understanding of the advantages and disadvantages of these types of loans.