Phil: 0:00

Welcome to the First Time Home Buyers Podcast. On today's episode, we're going to be discussing non-standard loan types. So if you're self-employed or a contractor, maybe you have inconsistent seasonal income, or had some major financial issues recently,

keep listening: 0:17

this episode is for you. Today we have Sarah Krasner with us, who's a Divisional President based on the West Coast, and has over 20 years of experience in the industry. She's seen it all and can give us some great ideas on alternative or non-standard loans. So welcome back.

Sarah: 0:42

Hi, Phil. Thank you so much.

Phil: 0:44

let's jump right in. Can you start by giving us a general overview of what a standard versus non-standard loan is? They're often referred to as Non-QM, so maybe let's start with that. What's that even stand for?

Sarah: 0:58

Sure. So a non QM is a non-qualified mortgage, and what a non-qualified mortgage is, it means it's not your standard loan. Not conventional, Or FHA or even VA or USDA loan. It is a non-conventional loan that helps different buyers, be able to obtain financing.

Phil: 1:22

So in general they're for people that wouldn't qualify or who don't fit into that standard bucket that you would get with those government type backed loans like FHA or VA like we've had other episodes about.

Sarah: 1:34

Of course. So with those loans, they're very cookie cutter, you have to meet certain qualifications. Like anything, Non-QM does have some of those, but they're a little bit more lenient. So let's say that you've owned your own business, but you tend to write off a lot of on your taxes.

Phil: 1:53

So yeah, business owners, that makes a lot of sense. So there's five different types of non-standard loans that I wanted us to cover. It's gonna be jumbo loans, bank statement loans, ITIN, interest- only loans, and ones where we've had bad credit recently. Do you think we could jump into each one, maybe give an idea of what that loan is, who that can help, and maybe some general qualifications on those?

Sarah: 2:19

Yes, absolutely.

Phil: 2:20

So let's start with jumbo loans. These are gonna be for larger purchases than kind of your standards. So when is a jumbo loan required?

Sarah: 2:28

A jumbo loan is required when the property does not fit into conforming limits. So every year we do increases or even decreases in what would be considered conventional financing. So the conventional limit right now for 2023 is $726,200. So any loan limit above that would be considered a jumbo.

Phil: 3:02

If you were trying to come in with an FHA or a conventional loan and it was an $800,000 or $900,000 house, you'd have to come in with a much larger down payment in order to make up the difference. And so a jumbo loan, does that have a lot more strict requirements than your normal, conventional loans?

Sarah: 3:20

It depends because there's several different types of jumbo loans that you can get. Typically you need to have higher credit quality than your typical FHA, or VA or USDA even. You have to be able to fit within some of the income guidelines, and you have to, you know, show proof that you can make the payments on that higher loan amount.

Phil: 3:45

So even though the jumbo loan is a higher dollar amount, it's not government backed. It doesn't necessarily mean that it's going to have a higher interest rate or even that much more strict requirements from credit, but you do still have to qualify for that higher dollar amount.

Sarah: 3:59

Correct. You definitely have to qualify for the higher, dollar amount. And recently, with jumbo loans, we're seeing lower interest rates than with conforming loans.

Phil: 4:09

Yeah, that's great. And now, in higher cost of living areas is a jumbo loan always required?

Sarah: 4:16

Not really, because with higher costs of living areas, you know, you can go up to over$900,000 for your loan amount. You know, If you're putting traditionally 5% down on a conventional, or three and a half percent down on an FHA, you're gonna be able to make those conforming guidelines.

Phil: 4:36

So if you're in San Diego, Orange County, LA, a lot of those have pretty much like a million dollar, limit because they're a higher cost of living area. So you may not need to have a jumbo loan. I wanted to jump into the next one, which is a bank statement loan. I think this is probably one of our favorite and most popular of these non-QM loans. So who is this bank statement loan best for?

Sarah: 5:03

So the bank statement loan is going to be best for anyone who is self-employed, who has an account that they deposit money into. Some lenders have a six month requirement, some are 12 and some are 24 month. With the bank statements, they all have to be from the same account, so you can't mix, you know, a business account with a personal account. Or a person who has two business accounts for the same business, or deposits into multiple accounts. You have to choose the account that has the most deposits, and ideally the least withdrawals, and submit that one to your lender.

Phil: 5:48

We see this a lot with self-employed or people who are contractors and they don't get a W-2. Or maybe you've got a side gig that actually brings in a lot of money, but you haven't been doing that steadily for two, three years and maybe standard financing wouldn't really look at that as consistent income.

Sarah: 6:08

Yes, I'd agree with that. We've done bank statement loans for for nail salons, for contractors, for chefs who own their own restaurants, even real estate agents.

Phil: 6:21

That's great because the bank statement loan is actually- there's, I think, less paperwork involved in a lot of the bank statement loans because it's pretty simplified as far as the documentation that you need.

Sarah: 6:34

You are going to see a higher interest rate because to a bank, a bank statement loan is a higher risk loan. For those that wouldn't normally fit into the conventional boxes of traditional financing, this is a very great opportunity for people to be able to purchase.

Phil: 6:54

I had a colleague who, owned their own company, and I remember discussing with them, they said, "Yeah, we have to wait two years before we're gonna be able to get qualified for a loan because, it's two years of steady income." But with a bank statement loan, it could have been as little as six or 12 months, as long as that income was coming in and consistent. So if you have a really good contract job, you're doing a lot of contract work, or you're self-employed and you've got that consistent income coming in, you don't have to wait that two years that maybe you've been told by others. You might be able to get after just six or 12 months. Again, as long as it's consistent and in that one account, and you're not withdrawing every single dollar coming out of it.

Sarah: 7:35

Absolutely.

Phil: 7:36

So the bank statement loan works really well for those that are self-employed. But I wanted to talk about those who are working in the U.S. but maybe don't have a standard social security number. They have an ITIN. And so this is an ITIN loan.

Sarah: 7:51

We do have programs for people that have ITINs. With that, you have a little bit higher of a down payment than a traditional, conventional, or FHA loan. It's typically anywhere as low as 5%, but typically it's 10 to 20% down. It's primary residences only, typically, and we're able to get these borrowers in. We need paycheck stubs, obviously, to prove that they work. In their paycheck stubs, the social on those need to match with what their ITIN shows. And many of these borrowers also file taxes using their ITIN. So just as long as we have that documentation, we are good to go.

Phil: 8:35

So this is fairly straightforward. The biggest difference is it can't be a government backed loan if you're not using a social security number. So if it's ITIN, it follows this slightly different process, does have a little bit higher down payment, but it allows someone who is working here, paying their taxes, filing their taxes, and wants to buy a home the ability to do so.

Sarah: 8:57

Absolutely, and I love helping get these borrowers into their own.

Phil: 9:02

This next one here is an interest only home loan. Who would be looking for something like that?

Sarah: 9:07

So typically investors are the ones looking for the interest only. However, right now, because interest rates are higher we can do 40 year loans and a lot of those 40 year loans can be interest only. Is that always the best idea? No, it doesn't work for every borrower, but to get some borrowers in it is definitely a program that's available and we're happy to do them. It's just another great alternative way to get buyers in. We can do them for investors or for primary residences. They again come with a little bit higher risk, so they're going to want to see all of the traditional items still, but it's a great loan to have in your back pocket.

Phil: 9:56

And besides investors, who do you typically lend out to for interest only home loans?

Sarah: 10:03

Even first time home buyers.

Phil: 10:05

Is this something that they would refi after a certain amount of time and get it to like a 30 year, or what do people normally do when they get these interest only home loans if they're not an investor?

Sarah: 10:17

That's one good thing about staying in contact with your loan officer is when you see rates, a good loan officer will let you know when rates go lower. They may want to sell or they may want to refinance into a traditional 30 year fixed later on, depending on what rates do. None of us have crystal balls, but rates are trending lower, so that's great news.

Phil: 10:43

These interest only home loans are a great way to get someone who was maybe priced out from an interest rate standpoint and was qualified previously. And it allows them to get in and as rates go down, your loan officer's gonna be able to help you out to get that refinancing when it makes the most sense. So this next one is for those folks that maybe had a major credit issue recently, maybe you had a bankruptcy. 12, 18 months ago, and normally you have to wait at least two years. What are the options on non-QM loans for something like this?

Sarah: 11:17

So this would be for people who would be able to have higher down payments because a higher down payment is required because it's considered a riskier loan. But for that borrower that just had some unfortunate credit circumstance, these ones would be great for them. You're definitely gonna have a higher interest rate and you're going to need to provide a really good letter of explanation, but this gives you the opportunity to get into that home.

Phil: 11:49

And I think that's great. There are options for those folks that have high income, maybe they've been able to save for a good size down payment, but they had that major credit issue that happened that's kept them from using those standard type loans and have not been approved elsewhere. These are the types of loans and these are the types of programs that honestly we're able to help you out with. We wanna get very creative and come up with ways to use these loans for your credit situation.

Sarah: 12:18

Absolutely, there's definitely positives and negatives to each of these loans, but talking about your situation with your loan officer is going to be the best bet for you.

Phil: 12:31

What I wanted to do, and I know each program's different, but maybe you could generalize a little bit what are some of those kind of basic credit requirements, income requirements, and maybe asset documents that they might need overall for these types of loans?

Sarah: 12:47

So each loan is going to be very different with the requirements. Typically, you want to have at least a 640 FICO score. A lot of times we can go down to a 620, but we can't do anything lower than that with these types of loans at this time. You're going to want to show proof of income via bank statements or tax returns or pay stubs or a combination of these. You're obviously always going to need to have money in the bank to prove down payment. And no, we cannot just use cash under the table or hidden in your mattress. We do need to see seasoned funds still.

Phil: 13:30

A lot of these do have a little bit higher credit requirements than your government backed loans because they are higher risk, but they're still doable. In general, are there any real advantages or disadvantages to these alternate types of loans?

Sarah: 13:44

There could be some disadvantages to them. If a particular borrower really wasn't in the financial situation that he has painted to the loan officer, it could cause him to lose out in foreclosure later on if they're not able to make the payments on time. That would be a major disadvantage. The advantages, I feel, mostly outweigh the disadvantages with being able to get into your own home and start building your own wealth through real estate as well as secure your own place. So I think that the advantages outweigh the disadvantages in most cases.

Phil: 14:24

And there are some disadvantages. They may be it's a higher down payment, the interest rates may be higher, not for all of them, and the type of documentation may be a little more in depth. However, I think, like you said, the ability to buy a home far outweighs any of those disadvantages. And with most of these programs, you really wanna keep in touch with your loan officer. Keep an eye on those interest rates because after you get through your credit, you've been building equity in your home, you're gonna be able to refinance into a more standard loan that may have some better terms for you.

Sarah: 15:01

I absolutely agree.

Phil: 15:02

So really in conclusion, the non-QM alternate types of loans are a really great option for those that don't meet the criteria for a standard loan. They give you an alternative to those who are self-employed. Maybe you're not a U.S. citizen or you had that financial hardship that disqualified you from standard loan types. The non-QM loans offer a variety of options with a lot of different qualification types. And so you can really benefit if you're looking for something like that and you didn't meet the standard criteria. So these loans have very unique features and benefits. You really wanna make sure you're talking to a professional who has experience in working with these, really understand the advantages and disadvantages of these types of loans. So Sarah, you're one of those people. Can you give us your contact info in case anyone wants to reach out to you directly? I'll also include it in the show notes.

Sarah: 15:59

Absolutely, you can call or text me at (702) 466-6430.

Phil: 16:07

Perfect. And when you reach out, please let her know that you heard her on our podcast here at the First Time Home Buyers. Also head over to FTHBPros.com. We've got all of our other episodes available, articles, resources along with access to our Facebook group where we have lenders and agents, including Sarah that can help answer your questions. Thank you for your support and happy home buying.