With nearly 16 million Americans working for themselves as of 2023, it's safe to say the self-employed workforce is rising. While entrepreneurship offers flexibility and independence, it also presents unique challenges—especially when securing a mortgage. This is where non-qualified mortgages (non-QM) come into play.
Unlike traditional mortgages requiring strict income verification, non-QM loans offer more flexible criteria. They evaluate alternative forms of net income verification, such as bank statements, assets, or rental income, to qualify.
In this article, we'll explore various non-QM mortgage solutions, breaking down how each option works and what makes them ideal for entrepreneurs.
Bank Statement Loans
If you're self-employed and your income changes from month to month, or you have tax deductions that reduce your reported income, but you still have strong savings and a steady cash flow, this loan option might be worth considering.
Bank statement loans allow you to use personal or business bank statements as proof of income instead of relying on tax returns. These programs look at your cash flow over time, giving a more accurate picture of your earning potential.
To qualify for a bank statement loan, you'll need to show 12 to 24 months of bank statements. Lenders will review your deposits during that period to confirm your income.
Asset-Based Loans
Asset-based loans are ideal for self-employed borrowers with significant assets who don't show a consistent income on their tax returns. This includes entrepreneurs with irregular monthly revenue, investors relying on capital gains, or retirees drawing from savings or investments.
To qualify for an asset-based loan, you'll need substantial liquid assets, such as savings or investments, that can cover several years of mortgage payments. Lenders typically require detailed verification of these assets to confirm they are stable enough to back the loan.
Stated Income Loans
Stated income loans allow you to declare your income without providing extensive documentation like tax returns or pay stubs. Instead, lenders rely on your stated income and other factors like credit score and down payment.
These loans were common before 2008 but are now offered under stricter guidelines due to borrowers overstating their income.
This loan may suit self-employed borrowers with complex or fluctuating incomes who struggle to provide traditional income verification but can demonstrate financial responsibility in other ways.
1099 Income Loans
As the name suggests, 1099 income loans are for self-employed individuals, freelancers, and independent contractors who receive 1099 forms instead of W-2s.
Unlike bank statement loans, which require a detailed review of monthly deposits over an extended period, 1099 income loans simplify the process by focusing primarily on the income reported on your 1099 forms.
To qualify, you usually need to provide 12 to 24 months of 1099 forms to demonstrate consistent earnings. Lenders may also request proof of ongoing contracts or business activity.
Is Buying a House Harder if You're Self-Employed?
Securing a mortgage doesn't have to be difficult. As a fellow entrepreneur, you know the value of hard work and determination. Opting for a non-QM loan can make purchasing your dream home possible. If you're considering this route, here's some advice:
- Keep detailed financial records for your business.
- Maintain a FICO score of at least 620.
- Have savings of at least 20% of your target home price.
At MARQ Mortgage, we specialize in helping self-employed borrowers find the best loan options for their unique financial situations. Are you ready to explore alternative mortgage solutions? Get started to see how a non-QM loan could be the key to unlock your new home.
