Don’t Qualify for a QM Mortgage? There are Options

By Brett Mosello March 31, 2015  4:31 p.m. EST

Qualified mortgages (QMs) are a relatively new loan product designed to be safer and more understandable than many mortgages that were written leading up to the housing collapse. The basis of these mortgages is that they are well documented and lenders must assess an individual’s ability to repay the loan over the lifetime rather than just qualify for it up front. They do this by carefully examining a borrower’s assets and debts to make a risk determination. This model works well for traditional workers with steady paychecks. However, self-employed individuals, entrepreneurs and small business owners often don’t qualify because they cannot document the consistent income required by QMs. However, there are many other ways that these individuals can still get affordable financing to purchase a home.

Seek Out Flexible Lenders

Part of the issue is that self employed individuals are allowed to write off more tax deductions, which lowers their income on their tax return. However, that income is what lenders look at when determining how much money they make. While some lenders won’t budge on these numbers, others will. Find a lender who will allow you to add back in items like depreciated assets, which can raise your federal income back up. It may take a few phone calls and research to find a lender who is knowledgeable about how to do this.

Stated Income Loans

While stated income loans aren’t as easy to come by as in previous years, they are still available. With this option, lenders will verify that you have income sources, but not necessarily the amount from each one. Instead, the borrower can state how much income they have. Be prepared to provide the names and contact information for clients, as the lender will contact them. Additionally, you must submit an IRS Form 4506 or 8821, which gives the lender access to your prior tax returns.

Opt for an Unconventional Loan

There is another loan option that is a perfect fit for small business owners and entrepreneurs. It’s called the alternative income verification loan. This loan is similar to no-doc loans but it requires more proof of income and is safer for the borrower. Instead of basing loan qualification on two years of tax returns, lenders base it on 12 months of business and personal bank statements. The borrower must also submit a profit and loss statement to the lender. The lender then analyses this information to determine how much actual cash flow the individual has. While this loan option typically has a percentage rate 1 percent higher than others, it’s a viable solution for non-traditional workers. These loans are currently only offered by niche lenders, so again it will take researching a few companies before you find one who is familiar with them.

Just because you can’t get a QM mortgage does not mean that you can’t purchase a home. The best solution for entrepreneurs and small business owners is to start the process early and plan to put more time and research into finding the right lender. If you need help getting through the process, contact the qualified mortgage brokers at Luxury Mortgage for help.

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