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.
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.
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.
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:
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).
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 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 $806,501. 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.
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.
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.
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.
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 as well as how to get a mortgage for a pre-construction condo in Miami.
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.
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.
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.
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.
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.
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.
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.
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.
While unconventional home loans offer unique advantages, it’s important to be aware of their potential drawbacks and risks.
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.
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.
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.
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.
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.
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.
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:
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.
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:
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:
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.
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.
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.
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.
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.
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.
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.
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:
Learn more about bridge loans, including how they work, and their pros and cons.
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.
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.
Here are 12 final points to remember about non-traditional lending:
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.
