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Traditional and Non-QM Jumbo Loans on Investment Properties
What are the mortgage lending requirements on investment property jumbo loans. Can you please explain the lending guidelines on traditional and non-QM jumbo loans, the borrowers credit and income requirements, the down payment requirements and closing costs, the maximum debt-to-income ratio, the mortgage rates on non-QM jumbo loans, and the various different types of traditional and non-QM jumbo loans? If you can explain the mortgage process on traditional and non-QM jumbo loans on investment properties, it will be greatly appreciated?
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2 Replies
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Of course! I will give you a complete overview of mortgage lending requirements for investment property jumbo loans, including traditional options and non-QM (non-qualified mortgage) options.
Traditional Jumbo Loans for Investment Properties:
Credit Requirements:
- Typically, 720+ credit score.
- Positive credit history with no late payments or collections.
Income Requirements:
- Stable income that can be verified.
- Generally, two years’ worth of tax returns and W-2s. If self-employed, you may need to provide 2-3 years of business tax returns.
Down Payment:
- Usually 25% – 30% of the purchase price.
- Some lenders may require up to 35% – 40% down on multi-unit properties.
Debt-to-Income Ratio (DTI):
- Usually capped at 43%.
- Some lenders may allow up to 50% DTI for strong applicants.
Reserves:
- Typically require 6-12 months’ worth of mortgage payments in reserves.
- This could increase with multiple investment properties financed.
Loan Limits:
Varies by lender and location; typically starts above conforming loan limits.
Property Types:
Single-family homes, multi-unit properties (2-4 units), condos
Non-QM Jumbo Loans for Investment Properties:
Credit Requirements:
- More flexible; some lenders accept scores as low as 580 – 600.
- It may still qualify after recent credit events such as bankruptcy or foreclosure.
Income Requirements:
Alternative documentation options are available
Bank statements, asset depletion, and rental income are all possible ways to verify income.
Down Payment:
Depending on the program and borrower qualifications, the total can range from 20% to 40%.
Higher interest rates might be charged for lower down payment scenarios.
Debt-to-Income Ratio (DTI):
It can go higher than traditional QM loans; the maximum varies by program/lender.
It may qualify with higher DTI if other factors, such as assets or reserves, are strong.
Reserves:
Different programs have different reserve requirements; typically, 6-12 months’ worth of payments.
Bank statements may be used to prove reserves in some cases.
Loan Limits: Can sometimes exceed traditional jumbo loan limits, up to $5 million or more.
Property Types: More flexible than conventional options: non-warrantable condos, mixed-use properties, etc.
Mortgage Rates on Non-QM Jumbo Loans:
- In general, rates will be higher than for traditional jumbo loans.
- Rates can range from 1% – 3% higher than those offered on conforming loans.
Rate is determined by credit score, down payment, and loan structure.
Types of Traditional and Non-QM Jumbo Loans:
Traditional:
- Fixed-Rate Jumbo Loans
- Adjustable-Rate Jumbo Loans (ARMs)
Interest-Only Jumbo Loans
Non-QM:
- Bank Statement Loans
- Asset Depletion Loans
- Debt Service Coverage Ratio (DSCR) Loans
- Foreign National Loans
- Recent Credit Event Loans (for those with recent foreclosures or bankruptcies)
Closing Costs:
- Similar to conventional loans, they typically range between 2% – 5% of the loan amount.
- This may include origination fees, appraisal fees, title insurance fees, etc.
Some lenders who are not QM may charge higher fees.
Traditional and non-QM jumbo loan mortgage process:
Pre-qualification: First, look at creditworthiness and financial situation
Loan application:
- Complete official application
- Give necessary documents (changes based on traditional or non-QM)
Document review:
- The lender goes through all the papers
- They might ask for more information
Property appraisal: A professional figures out how much the property is worth.
Underwriting:
- A detailed analysis of the borrower’s financial situation and property specifics.
- More manual underwriting may be required for non-QM loans.
Conditional approval: The loan is approved with some conditions.
Satisfaction of conditions:
Borrower submits any additional necessary documentation.
Final approval:
The lender gives the final green light for the loan
Closing:
- Sign all loan paperwork
- Pay closing costs and down payment
- Process differences are explained in brief below:
Traditional Jumbo:
- More streamlined process
- Tighter documentation standards
- It may take longer due to increased scrutiny
Non-QM Jumbo:
- More adaptable process
- Other forms of document verification are often allowed/accepted
- It may be faster, especially with specialized lenders and non-QM lenders involved
- Additional considerations for investment properties:
Rental income:
- 75% of rental income is typically used to qualify for traditional loans.
- Use a higher percentage or DSCR (debt service coverage ratio) to qualify for non-QM mortgages.
Property condition:
- Both usually require good condition
- Flexible with properties that need work on non-qm loans, though.
Experience:
Some lenders might need previous landlord experience, especially regarding larger amounts borrowed.
Portfolio concentration:
Certain lenders may limit the number of financed properties or total exposure to one borrower.
These are just general rules; they can greatly differ from lender to another. There are many types of niche products in the non-QM market that cater specifically to different borrowers’ situations. You must compare rates and work with a mortgage broker with experience lending on investment properties to find the perfect fit for your unique situation.
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Requirements of Mortgage Lending on Jumbo Loans for an Investment Property
Traditional Against Non-QM Jumbo Loans
Traditional Jumbo Loans:
Definition: These loans surpass Fannie Mae and Freddie Mac’s conforming loan limits and are usually used for expensive houses.
Guidelines: They follow tighter underwriting guidelines, almost similar to those of conforming loans, but with higher credit scores and income standards.
Non-QM Jumbo Loans:
Definition: These mortgages fail to meet standard underwriting requirements by Fannie Mae or Freddie Mac. They are designed for borrowers with unique financial situations.
Guidelines: More flexible underwriting criteria, allowing for alternative income verification methods and other non-traditional documentation.
Credit and Income Requirements of the Borrower
Credit Requirements:
Traditional Jumbo Loans: Generally require a minimum credit score of 700-740.
Non-QM Jumbo Loans: Depending on other factors, they can accept lower credit scores, such as 660, sometimes even less than this figure.
Income Requirements:
Traditional Jumbo Loans: They need full income documentation like tax returns, W-2s, pay stubs, etcetera.
Non-QM Jumbo Loans: Bank statements can be used instead of traditional documents to verify income; other options include asset depletion or profit and loss statements.
Down Payment Requirement and Closing Costs
Down Payment:
Traditional Jumbo Loans: They normally require a down payment of at least 20%, but some lenders may accept as low as 10% if the borrower has higher credit scores coupled with reserves.
Non-QM Jumbo Loans: Lenders may allow around 10-15% down payments, although this varies from one lender to another, depending on the borrower’s financial profile and other factors considered during the underwriting process.
Closing Costs:
These generally range between two percent (2%) and five percent (5%) of the borrowed amount vis-a-vis origination fees and appraisal fees, among other standard costs associated with closing.
Maximum Debt-to-Income Ratio (DTI)
Traditional Jumbo Loans: Typically capped at 43% DTI.
Non-QM Jumbo Loans: More flexible, sometimes allowing DTIs up to 50%, depending on compensating factors such as high credit scores or significant reserves.
Mortgage Rates on Non-QM Jumbo Loans
Non-QM Jumbo Loans: Due to the higher level of risk involved with these types of mortgages, they tend to attract higher interest rates than traditional ones. The rates vary widely based on the borrower’s financial profile vis-a-vis the lender’s policies but are usually one percent (1%) to two percent (2%) higher than conforming loan rates.
Types of Traditional and Non-QM Jumbo Loans
Traditional Jumbo Loans:
Fixed-Rate Mortgages: The interest rate is fixed for a certain period, after which it becomes adjustable.
Adjustable-Rate Loan Programs: These have lower initial interest rates that adjust periodically in line with market conditions surrounding them.
Non-QM Jumbo Loans:
Interest-Only Mortgages: For some periods, the borrower pays only the interest portion of their loan before making any principal repayments.
Bank Statement Mortgages: Instead of traditional documentation, income verification is done by looking at bank statements, showing inflow and outflow cash transactions over a certain period(s) determined during the underwriting process.
Asset Depletion Mortgages: Liquid assets belonging to an individual can be used as part of the qualification process for obtaining a mortgage loan amount requested, hence qualifying despite failure to meet minimum income requirements set forth under standard guidelines issued by Fannie Mae or Freddie Mac, etcetera.
Mortgage Process for Traditional and Non-QM Jumbo Loans on Investment Properties
Pre-Approval:
Traditional: Comprehensive documentation covering income, assets, and credit must be provided before pre-approval is granted for this loan category.
Non-QM: Alternative documentation, such as bank statements or asset statements, might be used before pre-approval is granted on non-QM jumbo loan applications meant for investment properties.
Application Submission:
Please complete and submit the loan application form with all required supporting documents.
Property Appraisal:
An appraiser evaluates the property’s value through an appraisal exercise, which shows its worth at that particular time, taking into consideration other factors affecting its value, such as location.
Underwriting:
Traditional: Underwriters review creditworthiness, income, and assets to determine whether or not borrowers meet the required standards set forth under this type of mortgage category.
Non-QM: There is more flexibility in terms of underwriting criteria since alternative income verification methods can be considered during the assessment process carried out by these lenders.
Approval and Conditions:
Loan approval may have conditions attached to it, which must be satisfied before the closing date is reached to disburse funds for buying a given investment property. Traditional jumbo loans have strict qualification rules; even so, investment property jumbo loans are tougher. On the other hand, non-qualified mortgage (non-QM) jumbo loans offer some flexibility but typically charge higher interest rates because they’re considered riskier by lenders who underwrite them, still being different than normal ones. Knowing this information can help someone prepare for success when applying and negotiating better loan terms.