In today’s mortgage market, traditional mortgage products are no longer the one-size-fits-all solution they once were. The economy is now driven by entrepreneurs, investors, high-income earners, and young adults who thrive in the gig economy. These borrowers are driving a demand for alternative mortgage products.
For these borrowers, non-qualified mortgage (non-QM) loans offer a premium alternative to conventional options. These loans empower lenders to accommodate unique financial situations while expanding access to a broader pool of potential clients, many of whom might otherwise have to reconsider homeownership altogether.
However, one factor continues to deter borrowers from exploring non-QM solutions: reputation. Non-QM loans are often associated with higher interest rates and unfavorable terms that verge on predatory lending. Fortunately, there are lenders out there working to change that perception.
Exploring the big picture of non-QM lending
When it comes to non-QM loans, borrower use cases often vary depending on the person. Despite that, there’s a common theme between each borrower’s use case: They’re creditworthy but unconventional.
One borrower may be a social media influencer with a Rolodex of clients and a 1099 that would put some full-time employees to shame. Another could be a real estate investor with incoming rental revenue from properties across the country.
Whatever the case, these borrowers need alternative ways to verify their income. But there’s excellent news — non-QM loans are designed to do precisely that, giving borrowers the freedom to use alternative income verification methods like bank statements, asset depletion, and more.
This is a massive benefit for mortgage lenders and self-employed borrowers who want to achieve homeownership. Recent market shifts have paved the way for lenders looking to use non-QM options in today’s market.
“Initially, non-QM lending faced skepticism as an alternative solution,” said Megan Willie, SVP regional sales manager at Acra Lending. “However, as the industry has matured, more lenders have integrated non-QM into their offerings, creating a more competitive environment in terms of service, rates, and product diversity.”
Common borrower use cases when choosing non-QM options
We’ve already identified who non-QM borrowers are and how they can qualify with alternative methods. But we’re missing the “why” in this study. Why would a borrower choose a non-QM loan, aside from the alternative qualification methods? Acra Lending has the answer:
According to SVP Megan Willie, “Non-QM loans offer flexible qualification criteria and competitive pricing, making them a compelling option for second homes and investment properties. In many cases, Non-QM loans provide more cost-effective solutions than agency options, especially for borrowers with unique financial profiles.”
Here are the most common use cases for non-QM loans:
Investment properties and second homes
Non-QM loans offer flexible qualification criteria for borrowers looking to purchase second homes or investment properties. They also offer competitive pricing, making them superior and cost-effective options when compared to standard agency options. According to data from Bankrate, the average mortgage rate for a second home loan is 6.7%. For Acra Lending, non-QM loans for non-owner-occupied (NOO) properties start at 6.2%.
Debt-service coverage ratio (DSCR)
DSCR loans simplify the qualification process by using a property’s potential cash flow instead of the borrower’s income. With this loan type, borrowers won’t need to rely on extensive documentation to acquire financing. With DSCR loans, it’s a lot easier for investors to qualify without worrying about traditional income verification requirements.
Asset depletion loans
Asset depletion loans, also known as asset dissipation loans, simplify and smooth the qualification process by allowing borrowers to use their liquid assets instead of relying on traditional income documentation. This is useful for high-income borrowers who have a substantial set of assets but a limited level of reportable income.
Eliminating misconceptions about non-traditional lending
One common misconception among brokers and borrowers is that non-QM loans are equivalent to subprime lending. Subprime lending involves offering credit opportunities to borrowers who are considered higher risk compared to those who are eligible for prime rates. According to the Consumer Financial Protection Bureau (CFPB), subprime scores typically range from 580 to 619.
However, non-QM loans aren’t designed for subprime borrowers in most cases. On the contrary, these loans are intended for well-qualified borrowers. According to Acra Lending, the average score for a non-QM loan is around 730, which falls into the good credit category. These borrowers are often equipped to handle payments, which moves a significant amount of pressure from lenders.
Premium rates, prime borrowers: Inside Acra’s Platinum Pricing advantage
Acra Lending sets itself apart with a pricing model that competes with some of the top non-qualified mortgage (QM) providers. The program, intended for borrowers with credit scores of 700 or higher, is designed for borrowers who want a pricing advantage. The program is ideal for borrowers with a loan-to-value (LTV) ratio of 80% or lower.
Acra’s Platinum Pricing also supports purchases and refinances, with multiple qualification options — some of which include complete income documentation, bank statements, 1099, DSCR, and asset depletion.
“Acra’s Platinum Pricing offers some of the most competitive rates in the industry for qualifying borrowers. This program is designed for those seeking an alternative lending solution with premium pricing advantages,” said Megan Willie.
What does the future of Non-QM lending look like?
The mortgage market isn’t what it used to be. More borrowers are turning toward non-traditional income sources to get into the homes they want. These borrowers are self-employed, investors, high-income earners, and young adults who operate under the gig economy. Fortunately, Acra Lending is committed to providing flexible, borrower-centric solutions that create homeownership opportunities.
