You’re living your dream life with passive income, minimizing taxes by offsetting income with expenses. Yet you can’t get a home loan!
The article Jay Voorhees from JVM Lending wrote about “When the Ultra-Wealthy Don’t Qualify For Mortgages” really hit home.
Jay offered to share some options for how affluent borrowers with great credit and ample assets may be able to get loans that don’t break the bank.
Watch the YouTube video or read what Jay had to say, below.
“The lending environment changed so much after the 2008 meltdown. Prior to 2008, there were a lot of options for borrowers like that. Especially if they had a lot of assets, or good credit, and especially both.
They could get extremely competitive loans with almost no income verification at all. Default rates were almost non-existent…as long as there was a large down payment.
But what happened is lenders got too loose with their guidelines and started funding loans with very low downpayments. With no income verification.
(See one of my fave movies The Big Short on Netflix.)
“Congress over-reacted.”
“And now they literally prohibit any of those types of loans. Now Fannie Mae, Freddie Mac, and very conservative Jumbo loans are the only game in town when it comes to getting a loan with low rates.
So it’s very frustrating. I even blogged a few years ago about a baseball player who was making 10 or 12 million dollars a year (here’s that article), and the poor guy had to be run through the wringer just to qualify for a loan. Even though his debt ratios were under 3 percent.
That’s kind of the nature of the lending environment we’re in right now. It’s very sad and very frustrating for a lot of very well-qualified borrowers who have a lot of assets, who have a lot of equity, huge downpayments and a lot of factors that otherwise make them very strong borrowers. But they just can’t verify income in the traditional manner.
Verifying income in the traditional manner refers to using tax returns and / or W2s and pay stubs to verify income.
Non-QM loans are the solution for borrowers without high net income.
So the only alternatives available now are what are called non-QM loans. Or non-qualified mortgages.
And borrowers can use these loans to get decent mortgages.
But the rates tend to be 1-3 percent higher than the rates you would get with a Fannie Mae loan.
What they can use as an alternative to providing tax returns are
- bank statements where we just take the last 12 months of their bank statements and add up their deposits then divide by 12 and that’s their “income.”
- We can also do asset depletion loans where we look at their assets to help them qualify for a loan. One of our more competitive loans you need assets equal to about the size of the mortgage to qualify. It’s not that much assets. So it’s a viable way to get a decent loan.
- And there are other options such as using rental income on a particular property to qualify for a loan. Those are called DSCR, or Debt Service Coverage Ratio loans.
And those are pretty much the options right now.
“We can find a loan for almost anybody in almost any circumstance as long as they have 20 percent down.”
Do you keep a non-QM loan forever or try to refinance at a lower rate?
Frankly, we think of them as temporary solutions.
About 80 percent of the buyers who do take those loans come back to us after a year or two to refinance and get a better loan.
Have you tried your best to pay no taxes? Try again.
We tell them what they have to do to qualify for a conventional loan. Particularly self-employed buyers, we can show them what kind of income they need to show on their tax returns in order to qualify, and they often have enough income that they’re able to do that.
They just haven’t in the past to avoid paying taxes.
If they’re willing to pay more taxes they can show more income in the qualifying year, and they can get a much better mortgage and refinance out of the non-qualified mortgage. (Be sure to know about pre-payment penalties!)
Susie says: There’s no shame in strategies to reduce taxes. Until you get denied for a mortgage!
Well sometimes it makes more sense if you’re saving $50 grand in taxes because of the way you’re structuring your income it’s probably worth it to keep on doing that even if it costs you $3,000 or more in mortgage interest. I’d still rather save $50,000 in taxes.
So it kind of depends. When buyers get frustrated because they can’t qualify, they have to consider how much they’re probably saving in taxes.
3 advantages of non-QM loans over hard money
Hard money is loans based on the value of the property being purchased. In the case of flippers, the hard money lender will look at the after-repair value (ARV) of the property.
- There’s a slightly smaller downpayment.
- There are lower fees with non-QM loans.
- Rates are lower with non-QM loans.
How much can you qualify for with a non-QM loan?
The team at JVM Lending is always happy to help. Before you go with any loan, it’s always a good idea to check with a few lenders to compare rates and programs.
Get smart with the JVM blog and glossary of home ownership terms.
