For millions of Americans, conventional mortgage lenders don’t always provide flexible options they need to secure financing on a new home. Because of this, it’s no wonder why non-QM (non-qualified mortgage) loans, designed for those with unique financial situations, have grown to make up 5% of the total mortgage market as of mid-2024 – a significant jump from less than 3% in 2020. With approximately 16.5 million self-employed workers representing 10.4% of the U.S. workforce, unconventional borrowers are driving demand for flexible, customizable lending options.
This guide explores non-traditional mortgage lenders and how they cater to diverse needs to help you achieve your homeownership and real estate investing goals.
What Is a Non-Traditional Mortgage Lender?
A non-traditional mortgage lender provides loans to individuals who don’t meet the strict requirements of traditional loans, like steady W2 income or a low debt-to-income (DTI) ratio. These lenders often offer non-qualified mortgages (non-QM loans), which are designed for individuals with unique income streams, like self-employed borrowers, retirees, or real estate investors.
Non-traditional and unconventional mortgage lenders are essentially the same, both focusing on flexible qualification requirements to accommodate a wide range of borrowers. In contrast to traditional loans that need to follow the strict lending guidelines set by the Consumer Financial Protection Bureau (CFPB), these lenders use alternative methods, like bank statements or asset-based income, to determine if you can repay the loan.
Types of Non-Traditional Mortgage Loans
Non-traditional and non-QM loans come in all shapes and sizes, which means there are many options for people with unique financial situations. From serving self-employed individuals to real estate investors, there’s a loan tailored to your needs.
Here’s a quick overview of some of the most popular non-QM loan types:
- Bank Statement Loans: With bank statement loans, lenders use deposits from your bank statements to verify your income instead of asking for W2s or tax returns. These loans are meant for self-employed individuals or business owners with irregular or non-traditional income.
- P&L Loans: P&L loans use a profit-and-loss statement prepared by a CPA to showcase your income and financial stability. They’re a practical solution for business owners who don’t have conventional income documentation.
- DSCR Loans: DSCR (Debt-Service Coverage Ratio) loans are tailored for real estate investors, with qualification based on a property’s rental income rather than the borrower’s personal income. The focus is on whether the rental income can cover the property’s mortgage payments.
- Asset Depletion Loans: Asset depletion loans allow borrowers to qualify by converting their liquid assets, like savings, investments, or retirement funds, into a monthly “income.” This option works well for high-net-worth individuals or retirees without steady documented income.
- Fix-and-Flip Loans: Fix-and-flip loans provide short-term financing for investors buying and renovating properties to sell for profit. These loans offer quick approvals and funding, making them ideal for fast-paced property flipping.
- Construction Loans: Construction loans are designed to finance building or renovating properties, covering expenses like labor, materials, and permits. Funds are usually disbursed in stages as the project progresses, which requires detailed plans and budgets.
- Interest-Only Mortgages: Interest-only mortgages let borrowers pay just the interest portion of their loan for an initial period, usually 5-10 years. They’re great for those who expect increased income or property value over time.
Who Can Benefit From Non-Traditional Mortgage Loans?
Non-traditional mortgage loans are designed to meet the needs of people who don’t fit the standard mold of conventional loans. For that reason, there are many flexible solutions for a wide range of individuals, including:
- Self-employed individuals and business owners with fluctuating or non-traditional income.
- Retirees who rely on assets rather than regular income.
- High-net-worth individuals (HNW) who may have significant wealth but limited taxable income.
- Real estate investors needing alternative qualification methods, like rental income.
- Foreign nationals without Social Security Numbers (SSNs) or a U.S. credit history.
- Borrowers with unique financial profiles, such as multiple income streams or non-traditional credit histories.
For those without W2s, tax returns, or pay stubs, non-traditional mortgage loans can provide the key to homeownership or investment opportunities.
Application and Approval Process
The application and approval process for a non-traditional mortgage is usually much faster and more streamlined than that of traditional loans, especially when working with private mortgage lenders. These lenders specialize in customizing loans to unique financial situations, which often makes their qualification requirements more flexible. Non-traditional mortgage lenders typically accept alternative income documentation, like bank statements, P&L statements, or proof of liquid assets, rather than tax returns, W2s, and pay stubs.
When it comes to the approval process of non-traditional mortgages, it’s typically more personalized and focuses on the borrower’s overall financial picture rather than rigid criteria. While exact requirements vary by loan type, common required documents include:
- Bank statements to verify income and cash flow.
- Proof of assets, like investment or retirement account statements.
- Rental income documentation for real estate investors.
- CPA-prepared P&L statements for business owners.
With less paperwork and more flexible qualification methods, these loans offer an easier, more tailored way to secure financing for those with unique needs.
Pros and Cons of Non-Traditional Mortgage Loans
Pros:
- Diverse loan options to fit specific needs
- Flexible qualification requirements for borrowers with non-traditional income sources
- Uses alternative income verification like bank statements, P&L statements, or assets
- Personalized approval process for a tailored lending approach
- Faster and more streamlined approval process
Cons:
- Slightly higher interest rates than conventional loans
- Limited availability
- Larger down payment typically required
Choosing a Non-Traditional Mortgage Lender
Finding the right non-traditional mortgage lender is key to securing a loan that fits your unique financial situation. With so many options available, it’s important to understand what sets these lenders apart and how to choose one that aligns with your needs.
What to Look for in a Non-Traditional Mortgage Lender
When you’re looking for a non-traditional mortgage lender, it’s important to find someone who understands your unique situation and can offer flexible options to match. Start by considering their experience with non-QM loans like bank statement or DSCR loans, and make sure they’re upfront about terms, rates, and fees. Checking reviews and their track record with other borrowers like you can also give you a good sense of what to expect.
If you want a lender that truly stands out, private mortgage lenders like us at Defy Mortgage are a great choice. At Defy, we specialize in helping individuals who have forged their own path and are looking for a more customized approach. Book a call with us or give us a ring at (615) 622-1032, and let’s find the loan that’s right for you!
Top 5 Non-Traditional Mortgage Lenders
Note: This list is in no particular order.
1. Rocket Mortgage
Rocket Mortgage is a top player in the mortgage industry and offers straightforward solutions for borrowers with unique financial profiles. Their user-friendly digital platform makes it easy for self-employed individuals, real estate investors, and others with non-traditional incomes to navigate the process. With fast approvals and loan options like bank statement and jumbo loans, they’re a solid choice for flexible financing.
2. Guaranteed Rate
Guaranteed Rate is known for providing customized mortgage solutions, making them a great fit for non-traditional borrowers. They specialize in non-QM products like DSCR loans for investors and bank statement loans for entrepreneurs. Their competitive rates and easy-to-use online platform make the mortgage process seamless and efficient.
3. Defy Mortgage
Defy Mortgage takes a fresh approach to lending, offering customized solutions for borrowers with non-traditional income or credit histories. They specialize in non-QM loans for self-employed individuals, investors, and retirees, providing fast approvals and flexible terms. With a mission to break down barriers, Defy is changing the game for unique borrowers.
4. New American Funding
New American Funding focuses on creating opportunities for borrowers who don’t fit the standard lending mold. They offer tailored non-QM options like bank statement and asset depletion loans, ideal for self-employed individuals, retirees, and investors. Their commitment to diversity and personalized service makes them a top pick for non-traditional financing needs.
5. Pennymac
Pennymac combines traditional and non-traditional mortgage options to serve a wide range of borrowers. They offer flexible products like bank statement loans and jumbo loans, ideal for those with non-traditional income. With a focus on technology and customer service, Pennymac makes the mortgage process straightforward and accessible.
Non-Traditional Mortgage Lender and Loan FAQs:
- What is a non-traditional mortgage lender?
A non-traditional mortgage lender provides financing options for borrowers who don’t meet conventional lending criteria. These lenders often offer flexible underwriting and loan products tailored to unique financial situations.
- How do non-traditional mortgage lenders differ from conventional lenders?
Non-traditional lenders evaluate your eligibility based on alternative documentation, such as bank statements or assets, instead of strict income and credit guidelines. They also tend to offer more customized and flexible loan solutions.
- What types of borrowers might benefit from a non-traditional mortgage?
Borrowers like self-employed individuals, retirees, real estate investors, and foreign nationals can benefit from non-traditional mortgages. These loans are ideal for anyone with non-traditional income, multiple income streams, or complex credit histories.
- What loan products do non-traditional mortgage lenders offer?
Non-traditional lenders offer products like bank statement loans, DSCR loans, asset depletion loans, and interest-only mortgages. These options cater to borrowers with unique financial situations, like irregular income or substantial assets.
- Are non-traditional mortgage lenders safe and reputable?
Most non-traditional lenders are safe and reputable, especially if they’re licensed and have positive customer reviews. It’s always important to research each lender’s track record and terms before committing to a loan.
- Do non-traditional lenders require a down payment?
Yes, non-traditional lenders typically require a down payment, though the amount varies depending on the loan type and your financial profile. Keep in mind that down payments may be higher for some non-QM loans to offset increased risk.
- How is income verified for non-traditional mortgages?
Non-traditional lenders often verify income using bank statements, P&L statements, or proof of assets rather than traditional W2s, pay stubs, or tax returns.
