Non-Traditional Alternative Mortgages: Your Ultimate Guide

Feeling trapped by traditional lending criteria?  Explore the world of alternative mortgages.

Alternative mortgage options have emerged as a vital solution for many borrowers who feel trapped by traditional lending criteria.  These non-traditional loan programs extend beyond the conservative boundaries of mortgage lending, offering flexibility and freedom that traditional mortgages often cannot. 

Whether you’re looking to purchase a new property or you’re a current property owner looking to refinance, this guide will navigate you through the intricacies of alternative mortgage lending.

What is an alternative mortgage?

Alternative mortgages are conventional non-conforming loans.  Examples of alternative mortgages include jumbo loans, loans that allow for minimal income documentation, loans for affluent borrowers with tricky finances such as self-employed borrowers or new professionals, and loans for properties with non-standard features such as large-acreage properties or non-warrantable condominiums.

Breaking down the definition further, alternative mortgages are “conventional,” which is a lending industry term of art that simply means they are not part of a specific government program such as the Federal Housing Administration (FHA) or Department of Veteran Affairs (VA). 

Alternative mortgages are also “non-conforming” because they fall outside Fannie Mae and Freddie Mac guidelines. 

(To clarify, while alternative mortgages are technically “conventional,” they are commonly referred to as “unconventional” in the sense that they are out of the ordinary, offering more flexible standards as compared to traditional loans.  Therefore, we loosely use the term “unconventional” throughout this article as such, even though alternative mortgages are, strictly speaking, conventional.)

Let’s dive deeper into the world of alternative home loans.

Understanding the concept of non-traditional mortgage loans

First, a little bit of background.  Many borrowers often need non-traditional mortgage loans called non-QM loans (defined below) because these flexible lending solutions accommodate their unique income structures and financial circumstances, which traditional mortgage products may not accommodate.

 

Qualified mortgages (QM)

The Dodd-Frank Wall Street Reform and Consumer Protection Act was born in the aftermath of the 2008 U.S. subprime mortgage crisis to help better regulate this industry.  The statute requires mortgage lenders to carefully examine a borrower’s “ability to repay” based on eight underwriting guidelines:

  1. Current or reasonably expected income or assets;
  2. Current employment status;
  3. The monthly payment on the covered transaction;
  4. The monthly payment on any simultaneous loan;
  5. The monthly payment for mortgage-related obligations;
  6. Current debt obligations, alimony, and child support; 
  7. The monthly debt-to-income ratio (DTI); and 
  8. Credit history.

Lenders who strictly follow those guidelines are presumed to have complied with the ability-to-repay requirement and their mortgages are given safe harbor as “qualified mortgages” (QM).

 

Non-qualified mortgages (Non-QM)

The guidelines for QM loans can be quite strict.  For example, under guideline #7 for DTI, the borrower’s DTI cannot exceed 43%, which can be a difficult requirement for many borrowers to satisfy.

These limitations led to the creation of “non-qualified mortgages” (non-QM) to fill the gap and provide an alternative to qualified mortgages.

Importantly, non-QM mortgage lenders are also required to assess your ability to repay, but they do so in a more relaxed way.  For example, for the DTI guideline, some non-QM lenders accept a DTI as high as 50% or even 55%. 

Because non-QM lenders do not strictly adhere to the 8 ability-to-repay guidelines, their loans do not receive the presumption of safe harbor compliance.  Therefore, traditional lenders and banks refrain from offering these products.  

When it comes to a home mortgage for special situations, a non-QM lender understands your unique circumstances, whether it’s an issue with your personal profile (e.g., low credit score, high DTI) or something about the collateral is risky (e.g., nonwarrantable condo, large acreage property, short-term rental property).

Therefore, depending on your set of circumstances, an alternative non-QM mortgage that uses common sense underwriting may be your best bet for getting approved.

Want to learn more about the world of alternative mortgage lending?

6 popular alternative mortgage options you need to know about

The landscape of alternative mortgage options is rich and varied, catering to a wide range of needs and circumstances. At DAK Mortgage, we specialize in creative, outside-the-box residential loans that provide solutions where traditional lenders may fall short. Here, we explore some of the key alternative mortgage financing options available, each tailored to specific borrower profiles.

Jumbo loans: beyond conforming limits

Jumbo loans are designed for property purchases and refinances that exceed the conforming loan limits set by the Federal Housing Finance Agency (FHFA).

In most counties in Florida, for instance, a jumbo loan for a single-family residence starts at $766,551. These loans are ideal for borrowers looking to invest in high-value properties and require a lender who understands the complexities of larger loan amounts.  Whether you need to know more about the jumbo loan limit in Florida or the possibility of getting a super jumbo loan in California, we can help.

Financing for non-U.S. citizens: a global approach

We recognize the unique challenges faced by non-U.S. citizens seeking mortgage loans for properties in the United States. Our non-QM programs cater to permanent residents, non-permanent residents, and foreign nationals, offering flexible terms and understanding the nuances of international income and credit histories. Explore home loans for non-U.S. citizens in Florida.

Self-employed borrowers: tailored solutions

When it comes to non-traditional mortgages, the classic non-QM example is loan programs specifically designed for self-employed borrowers.  For the self-employed, traditional income verification can be a hurdle. Our loan programs for self-employed individuals accept alternative income documentation, such as bank statements and profit-and-loss statements, acknowledging the varied nature of self-employment income.  No tax returns are required. Discover self-employed mortgages in Florida.

No-ratio loans: no calculation of DTI

A no-ratio loan (also known as a “no doc loan”) is perhaps one of the most revolutionary alternative mortgage financing options.  This unique loan program does not require any calculation of the borrower’s DTI.  Quite simply, there is no verification of employment or income required.  This approach is appealing to self-employed individuals with complex or unconventional income sources, or borrowers who have financial privacy concerns.

Offered by non-QM lenders for owner-occupied properties, these no-income verification loans simplify the application process and increase approval chances for certain borrowers. However, they often come with higher interest rates, and the focus during the application is on the borrower’s down payment, credit history, and asset reserves.

Non-warrantable condominiums: expanding horizons

Sometimes, borrowers need alternative financing options for homes that don’t satisfy Fannie Mae and Freddie Mac guidelines.  For example, financing non-warrantable condominiums can be challenging with traditional lenders. Our programs offer more lenient requirements and higher loan amounts, making it easier for borrowers interested in unique condo properties that don’t meet Fannie and Freddie guidelines. Learn more about non-warrantable condo loans.

Investment property loans: empowering investors

Whether you’re looking to buy an investment property to add to your current portfolio or refinance your current mortgage, our investment property loans provide innovative solutions. From DSCR loans to rental portfolio loans to short-term rental property loans, we support your investment goals with flexible lending options. Explore residential investment loans in Florida.

Curious about alternative mortgage programs?

Benefits of non-traditional home loans

The world of unconventional mortgage lending offers numerous advantages, particularly for those who find themselves outside the traditional lending criteria. Here, we explore the key benefits of opting for non-traditional mortgage loans, highlighting how they can be a game-changer for many borrowers.

Flexibility in qualification criteria

A non-traditional mortgage loan often has more lenient qualification criteria compared to conventional mortgage loans. This flexibility is particularly beneficial for borrowers with unique financial situations, such as self-employed individuals, those with irregular incomes, or those with less-than-perfect credit scores. This adaptability ensures that a wider range of borrowers can access home financing.

Higher borrowing limits

For those looking to purchase or refinance high-value properties, nonconforming jumbo mortgages offer higher borrowing limits. This is essential in markets where property values exceed the limits set for conforming loans, allowing borrowers to invest in their desired properties without being constrained by traditional lending caps.

Also, if you are looking for a jumbo cashout refinance, an alternative mortgage may allow unlimited cashout at the closing table, whereas traditional lenders typically have caps.

Innovative loan structures

Unconventional mortgage loans come in various structures that can be tailored to individual needs. From interest-only loans to adjustable-rate mortgages (ARMs), these products provide options that can align better with the borrower’s financial plans and goals, offering a level of customization not typically found in standard mortgage products.

Read our comprehensive guide on how does an ARM mortgage work.

Opportunities for diverse property types

There are also non-traditional mortgage products for property types that do not qualify under traditional loan programs. This includes non-warrantable condos, investment properties, and even unique properties like farms or properties with large acreage, expanding the possibilities for borrowers.

Accessibility for non-U.S. citizens

For non-U.S. citizens, including foreign nationals and residents with work visas, alternative mortgage options provide an accessible path to property ownership and refinancing. These programs understand and accommodate the complexities of international credit and income verification, making real estate investing feasible for a global clientele.

Solutions for self-employed borrowers

Self-employed individuals often face challenges in proving consistent income through traditional means. Non-QM mortgages offer alternative documentation options, such as bank statements or profit-and-loss statements, making it easier for self-employed individuals to qualify for home financing.

Drawbacks of unconventional home loans to be aware of

While unconventional home loans offer unique advantages, it’s important to be aware of their potential drawbacks and risks. 

Potentially higher interest rates

Alternative home financing usually offers higher interest rates compared to traditional mortgages. This is due to the perceived higher risk associated with non-traditional lending.  For example, because these loans are not backed by Fannie Mae and Freddie Mac, it is more difficult for lenders to sell them on the secondary market.  This translates into a higher interest rate for you.

Borrowers should carefully consider the long-term financial implications of these rates on their overall loan costs.

Stricter terms on certain loan types

Some home loan alternatives, such as jumbo loans or no-ratio loans, may come with stricter terms and conditions.  Like many things in life, there are tradeoffs.  Jumbo and super jumbo loans open doors to investing in luxury real estate; however, due to the increased risk to the lender, a higher credit score is required.  Likewise, for no-ratio loans, in exchange for not having to verify your income or employment, you’re required to have a higher credit score and sufficient post-closing reserves.

Variable rate risks

Adjustable-rate mortgages (ARMs), a common feature in alternative mortgage financing, can pose risks due to fluctuating interest rates. While they may offer lower initial rates, the uncertainty of rate changes can impact monthly payments and overall loan affordability in the long term.  It is important to compare ARMs to fixed-rate mortgages.

Complexity of loan products

The diverse range of alternative, non-QM mortgage products can be complex and challenging to understand. Borrowers should work with a knowledgeable mortgage broker to ensure they fully comprehend the terms, conditions, and implications of these loan types to avoid any unforeseen complications.

Want to discuss the pros and cons of alternative mortgages?

Key requirements for obtaining unconventional mortgages

Whether you’re looking to purchase a home or refinance a currently owned property, unconventional mortgages are appealing because their key requirements are generally more relaxed than traditional mortgages.   

Exploring the criteria set by non-traditional lenders

As mentioned above, Dodd-Frank requires all mortgage lenders (traditional and non-traditional) to scrutinize the borrower’s “ability to repay” based on eight underwriting guidelines:

  1. Current or reasonably expected income or assets;
  2. Current employment status;
  3. The monthly payment on the covered transaction;
  4. The monthly payment on any simultaneous loan;
  5. The monthly payment for mortgage-related obligations;
  6. Current debt obligations, alimony, and child support; 
  7. The monthly debt-to-income ratio (DTI); and 
  8. Credit history.

Traditional lenders follow those 8 guidelines to a tee.

Non-QM alternative lenders also follow those 8 guidelines to assess the borrower’s ability to repay, but they color outside the lines in more creative ways.

Let’s explore how unconventional financing programs offer more flexible guidelines in two main areas:  (1) income and employment; and (2) credit history.

Alternative mortgage options have relaxed income and employment guidelines

When it comes to income and employment, traditional lenders require full documentation of income (usually through 2 years of tax returns, W2s, and recent paystubs) and a solid track record of employment without any gaps.  Additionally, a DTI no greater than 43% is required.

For borrowers who do not fall into that box, non-QM lenders offer greater flexibility through programs such as:

  • Alternative documentation loan:  Instead of 2 years of tax returns, the borrower provides other income documentation such as business bank statements, a profit-and-loss statement, 1099s, a written verification of employment, or a CPA letter.  Another alternative is 1 year of tax returns instead of 2 years.  For certain borrowers (e.g., self-employed individuals or borrowers who have gaps in employment), those alternative income documents more accurately reflect their true income, maximizing their chances of satisfying the lender’s DTI requirement.
  • Asset depletion loan:  A variant of the alternative documentation loan, this type of loan uses the borrower’s significant assets as income.  This program (also known as asset utilization) is beneficial for borrowers with significant wealth but limited documented income. Lenders calculate the duration that the borrower’s assets can generate enough income to cover the mortgage and carrying costs, and if it meets the lender’s threshold, the mortgage is approved.
  • No ratio loan:  Under this option, DTI is not calculated at all, nor is income or employment verified.  Instead, the lender relies heavily on the borrower’s credit score, down payment, and post-closing reserves to assess the borrower’s ability to repay.
  • DSCR loan:  The debt service coverage ratio (DSCR) loan is the analog of the no-ratio loan, but for investment properties instead of owner-occupied properties.  Instead of calculating the borrower’s DTI, emphasis is placed on the rents and cash flow of the property as measured by the DSCR.  The lender therefore relies on the property’s strong rental income to confirm the borrower’s ability to repay.

Non-traditional mortgage loans have more lenient credit guidelines

When it comes to credit history, traditional lenders such as banks typically require stellar scores and no recent mortgage late payments or credit events such as foreclosures and bankruptcies.

By contrast, alternative mortgage lending sources typically offer more forgiving credit standards, including:

  • Lower minimum credit scores:  Some lenders accept credit scores in the 500s, as long as the borrower has compensating factors to demonstrate the ability to repay, such as significant post-closing reserves or, in the case of a refinance, significant equity in the property.
  • Shorter waiting periods:  Traditional lenders require several years to have passed since a negative credit event occurred (bankruptcy, foreclosure, short sale, deed-in-lieu, modification).  By contrast, non-traditional lenders require shorter waiting periods such as 1 year (or even as short as a few months as long as there a strong compensating factors).
  • Delinquent taxes:  For conservative lenders, being delinquent in federal income taxes would be an automatic disqualification.  However, the borrower may proceed with more flexible lenders, as long as they can provide an approved IRS installment agreement with repayment terms and show they are current on the payments.

In sum, even when you apply for an unconventional lending option, the lender will always assess your ability to repay the loan.  Alternative mortgage lenders set themselves apart by offering more flexible options to get to the ability-to-repay conclusion.

Are you a good candidate for a non-traditional mortgage?

Steps to improve your chances of qualifying for alternative home loans

Non-traditional home loans can be a more accessible path to homeownership and refinancing for many, but it still requires careful preparation and strategy. Here are key steps you can take to enhance your eligibility and strengthen your loan application.

Strengthen your credit score

Even though unconventional loans may be more forgiving with credit scores, having a stronger credit score can significantly improve your loan terms, particularly if you’re aiming for a certain LTV. Focus on paying down debts, avoiding new credit inquiries, and correcting any errors on your credit report to boost your score.

Optimize your debt-to-income ratio

A lower debt-to-income ratio is always favorable in the eyes of lenders. Work on reducing your existing debts and increasing your income, if possible, to improve this ratio. This step not only enhances your loan eligibility but also contributes to your overall financial health.  

As a mortgage alternative, borrowers who prefer not to have their DTI calculated can always take advantage of the no ratio program described above.

Save for a larger down payment

While some unconventional loans require smaller down payments, saving for a larger down payment can be advantageous. It can lead to better interest rates, lower monthly payments, and a stronger loan application overall.

Gather comprehensive financial documentation

Even if you opt for an alternative documentation program, it is still important to prepare thorough and accurate financial documentation. This may include bank statements and profit and loss statements, but typically not tax returns.  Comprehensive documentation can demonstrate your financial stability and repayment capacity to lenders.

Seek mortgage professional advice

Consider consulting with a knowledgeable mortgage broker who specializes in alternative lending mortgage options and has a track record in closing these kinds of deals. Their expertise can guide you through the application process, help you understand the nuances of different loan products, and find the best fit for your alternative mortgage lending needs.

Bridge loans: a special type of unconventional mortgage lending

If you find yourself in a position where you still can’t qualify under any of the non-traditional home loans discussed above, you may want to explore the possibility of getting a bridge loan as a temporary solution.

Also known as private money loans or hard money loans, bridge loans are short-term loans for borrowers with an immediate need for funds. 

For example, if you are a buyer under contract to purchase a hot property, and the seller is threatening to switch to a different buyer if you can’t timely find financing, you may need a bridge loan.  

Here are some highlights of bridge loans:

  • These specialized lenders base their ability-to-repay analysis solely on the value of the subject property.
  • Because the sole focus is on the property value, bridge loans typically close quickly, usually within 1-2 weeks.
  • They usually come with high interest rates that could be in the double digits.
  • The average term is 1-3 years.
  • Typically, this type of loan has interest-only payments throughout the life of the loan, with a balloon payment at the maturity date.
  • Usually, there is no prepayment penalty, which affords you the ability to pay back the loan when the property is sold, or refinance as soon as you fix whatever issue was preventing you from getting an alternative mortgage in the first place.

Learn more about bridge loans, including how they work, and their pros and cons.

Key considerations before choosing an unconventional home loan

Before applying for an unconventional home loan, here are some key considerations to keep in mind.

Even if you’re leaning towards an unconventional loan, it’s wise to compare it with traditional loan options. This comparison can help you understand the pros and cons of each and make an informed decision.

However, for many borrowers, using traditional mortgage routes may simply not be realistic.  In that case, the only option is to apply for a mortgage with more flexible guidelines.

Some borrowers believe that alternative mortgages come with much higher interest rates and closing costs than traditional loans.  While that may be true, the focus should not be on mortgage rates.  Instead, the focus should be on finding the right lender that offers the best solution and the most realistic chances of getting that final loan approval.

If you’ve had your application for a mortgage denied, read our guide on how to get approved.

Why use DAK Mortgage for your alternative mortgages

When it comes to navigating the complexities of alternative mortgages, it is crucial to work with an expert mortgage broker.  The vast majority of non-QM alternative mortgage lenders are wholesale lenders, which means you can only apply to them via a licensed mortgage broker.

At DAK Mortgage, we specialize in working with the top non-QM lenders in Florida and around the country that provide tailored mortgage solutions.

Whether you want to buy a new property or you’re looking to refinance your current property, we can help find the best mortgage program for your situation.

We are experts in alternative, non-QM lending

Key takeaways on non-traditional lending

Here are 12 final points to remember about non-traditional lending:

  1. Overview of Alternative Mortgages: These are non-traditional loan programs that provide more flexibility than traditional mortgages. They cater to a variety of borrowers, including those with unique financial situations or those seeking loans for non-standard properties.  Like traditional lenders, alternative lenders also assess a borrower’s ability to repay, but they do so in a more relaxed way.
  2. Definition and Types: Alternative mortgages are conventional non-conforming loans, such as jumbo loans, minimal income documentation loans, and loans for unique properties like large-acreage properties or non-warrantable condominiums.
  3. Common Sense Underwriting: Alternative lenders offer more lenient qualification criteria, making them suitable for self-employed individuals, borrowers with irregular incomes, or those with less-than-perfect credit scores.
  4. Qualified vs. Non-Qualified Mortgages: Non-QM loans are alternatives to qualified mortgages, providing options for borrowers who can’t meet strict QM guidelines, such as the 43% DTI limit.
  5. Popular Alternative Mortgage Options: Includes jumbo loans, financing for non-U.S. citizens, tailored solutions for self-employed borrowers, no-ratio loans, financing for non-warrantable condominiums, and investment property loans.
  6. Benefits of Non-Traditional Home Loans: They offer higher borrowing limits, innovative loan structures, opportunities for diverse property types, accessibility for non-U.S. citizens, and solutions for self-employed borrowers.
  7. Potential Drawbacks: These can include higher interest rates, stricter terms on certain loan types, risks associated with adjustable-rate mortgages, and the complexity of loan products.
  8. Key Requirements for Obtaining Unconventional Mortgages: While more relaxed than traditional mortgages, they still require analysis of the borrower’s ability to repay, focusing on areas like income, employment, and credit history.
  9. Steps to Improve Qualification Chances: Strengthening credit score, optimizing DTI ratio, saving for a larger down payment, gathering comprehensive financial documentation, and seeking professional advice.
  10. Bridge Loans as an Option: For those who don’t qualify even for non-traditional home loans, bridge loans can be a temporary solution, focusing on the value of the property.
  11. Key Considerations Before Choosing: It’s essential to compare unconventional loans with traditional options and understand the focus on flexible guidelines and realistic chances of loan approval.
  12. Role of Mortgage Brokers in Alternative Mortgages: Mortgage brokers play a critical role in navigating alternative mortgages, as many non-QM lenders work exclusively through brokers.

At DAK Mortgage, we are committed to guiding you through this journey, offering expert advice and tailored solutions in the field of alternative mortgages.  No matter your situation, programs are available to enable you to purchase or refinance your dream home. 

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