Non-QM Investor Loans

In a lending world defined by strict qualifications, non-qualified mortgage (non-QM) investor loans can provide investors with a powerful alternative financing option. These loans are designed for real estate investors in need of funding that goes beyond the typical documentation and underwriting rules of qualified mortgages.

Whether you’re buying your first property, scaling a rental portfolio, flipping properties, or investing through an LLC, a non-QM investor loan may be more in line with what you need compared to standard financing.

This article will define non-QM investor loans, how they work, and why they might be the missing piece in your investment strategy.

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What Is a Non-QM Loan?

A non-QM loan is a mortgage that doesn’t meet the Consumer Financial Protection Bureau’s (CFPB) definition of a qualified mortgage. These loans are designed to offer an alternative path to homeownership for borrowers with sufficient wealth and rental income that may not be accurately reflected on traditional income documents, like W-2s or tax returns.

While they still require lenders to verify a borrower’s ability to repay, non-QM investor loans do so through alternative verification methods tailored to the unique financial situations of real estate investors. This means borrowers can qualify based on the property’s cash flow and financial health instead of conventional metrics.

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Who Are Non-QM Investor Loans Suitable For?

Non-QM investor loans are designed for individuals in various situations:

  • Self-employed investors: Many investors are self-employed and earn an income that may fluctuate. They may also have substantial tax write-offs and deductions that can make their taxable income appear lower than their actual cash flow, making it more difficult to qualify with W-2s or tax returns.
  • LLC real estate purchases: Real estate investors often hold properties in an LLC for asset protection or tax benefits. Many non-QM lenders allow loans to be titled to an LLC, which is ideal for investors who prefer to purchase a property under a business entity.
  • Property-based (not personal income-based) financing: While traditional underwriting focuses on a borrower’s job, income, and credit score, investor loans also focus on whether the property pays for itself. A non-QM investor loan leverages additional metrics, like Debt Service Coverage Ratio (DSCR), to qualify a borrower based on rental income versus mortgage payments.
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Features of Non-QM Investor Loans

Non-QM investor loans are characterized by the following:

Flexible Income Verification

Alternative forms of income documentation are accepted, such as the following: Bank statements; Liquid assets; Actual & projected rental income; Property’s Net Operating Income (NOI)

Higher Debt-to-Income (DTI) Ratios

Standard QM mortgages typically cap DTI ratios at 43%, but non-QM investor loans often allow for higher ratios, sometimes up to 50% or more. This is useful for investors who have high debt as a result of their real estate portfolio.

Credit Score

While non-QM loans focus more on the cash flow and financial strength of the property, lenders still assess the borrower’s creditworthiness as part of the loan qualification process. Generally speaking, a credit score of at least 620+ is required.

Higher Interest Rates

Non-QM investor loans pose a higher risk for lenders, who typically offset this risk in part by charging slightly higher interest rates compared to conventional mortgages.

Higher Down Payments

Borrowers usually need a larger down payment, as much as 15% to 30% or more, compared to traditional loans.

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Are Non-QM Loans Safe?

Non-QM investor loans are not subprime loans. While they may be structured outside of Fannie Mae/Freddie Mac guidelines, non-QM investor loans are fully underwritten and backed by valuable assets that demonstrate positive cash flow.

By working with a licensed non-QM lender that follows state and federal lending regulations, non-QM investor loans are a safe lending tool available only to capable borrowers who are financially stable but may not fit the traditional mold.

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Pros and Cons of Non-QM Investor Loans

Weighing the pros and cons of non-QM investor loans helps determine if the flexibility of this loan type outweighs the potential trade-offs.

Pros:

  • Flexible Income Documentation: Qualify using rent rolls, bank statements, and assets.
  • LLC Borrowing Allowed: Borrow under an LLC, trust, or corporation to protect personal assets.
  • Customized Terms: Many non-QM lenders may offer terms and payment options that are tailored to the needs of the investor.

Cons:

  • Higher Interest Rates: Non-QM loans often come with slightly higher interest rates compared to traditional mortgages due to the higher perceived lender risk.
  • Higher Down Payments: Larger down payments are typically required, which can impact cash flow projections.
  • Limited Lender Availability: Non-QM investor loans are not as readily accessible as traditional mortgages. You’ll need to look for a lender that offers these unique loan types.

Non-QM Investor Loans vs. Traditional Mortgages

Different mortgage programs are geared towards different types of borrowers. While conventional mortgages are meant for traditionally employed borrowers with sufficient income and strong credit, non-QM investor loans offer flexibility for those without traditional income documents.

The following chart compares non-QM investor loans with conventional mortgages:

Feature

Non-QM Investor Loans

Conventional Mortgages

Purpose

To finance the purchase of investment properties

To finance the purchase of an owner-occupied home

Suitable For

Self-employed individuals & investors without traditional income documentation

Employed borrowers with strong income & credit

Income Verification

– DSCR calculations

– Bank statements

– Rent rolls

-W-2s

-Pay stubs

-Tax returns

Debt-to-Income (DTI) Ratio

Typically capped at 45% — 50%

Typically capped at 43%

Interest Rates

Higher due to increased lender risk

Lower for borrowers with strong credit

Down Payment

Typically 15% – 20%+

As low as 3%

Mortgage Insurance

Not required

Required if down payment is less than 20%

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FAQs

Do non-QM investor loans require income verification?

Yes, but not in the traditional sense. Rather than focusing solely on W-2s and tax returns, non-QM investor loans assess other metrics, such as the property’s rental income relative to its debts.

Can I qualify without a job or traditional income?

Yes, as long as the rental income from the property pays for its debts and meets the lender’s guidelines.

What types of properties can be financed using a non-QM investor loan?

Non-QM investor loans typically cover non-owner-occupied properties, such as single-family homes, multifamily properties (2-4 units), townhouses, and condos.

Is there a limit to how many properties I can finance?

Non-QM lenders often allow multiple properties to be financed using non-QM investor loans.

Are interest rates higher on non-QM loans?

Generally, yes, rates are typically slightly higher than conventional mortgages to compensate for the higher risk.

Is mortgage insurance required?

No, private mortgage insurance (PMI) is typically not required for non-QM investor loans, which helps improve cash flow.

How quickly can I close a non-QM investor loan?

Many non-QM loans can close in as little as 2 to 4 weeks, depending on the complexity of the documentation, how quickly the paperwork is provided, and property conditions.

Who offers non-QM investor loans in the Pacific Northwest?

Sammamish Mortgage offers non-QM investor loans, designed for real estate investors who prefer to qualify based on property income rather than personal income or tax returns.

Where can I find a lender that offers in-house underwriting?

Sammamish Mortgage offers in-house underwriting, allowing for full control over the loan process. This allows for faster approvals and a smoother experience for borrowers.

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Final Thoughts

Non-QM investor loans offer investors a strategic advantage to leverage capital effectively. While these loans come with higher interest rates, they offer many real estate investors access to financing when conventional mortgages are out of reach.

Need Financing?

If you’re looking to buy an investment property in the Pacific Northwest region — including WA, OR, ID, CO, and CA — we can help. At Sammamish Mortgage, we offer various non-QM investor loan options for those without traditional employment documentation. Visit our website to get an instant rate quote, or get in touch with us today to have your mortgage questions answered!

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