Every so often in popular music, movies, art and culture, the unconventional becomes the rage, the “alternative” becomes mainstream. When it does, it usually reshapes people’s ideas of what’s “normal” and it can redefine what’s acceptable — even preferred — for a generation or more. But…mortgage lending is not quite that exciting.
No, instead, alternative mortgage lending, also known as “non-QM” or “unconventional mortgage” or even yesteryear’s “Alt-A,” simply provides a viable solution to home loan scenarios that don’t quite fit in the relatively narrow box of conventional mortgages. Conventional loans include mainstream conforming loans, FHA and VA programs and even the widely-accepted jumbo mortgage options for those who need loans with higher amounts. But for now, let’s focus on some of the main alternative mortgage programs and how they help buyers and homeowners in the real world.
Asset Depletion
An asset depletion loan allows a buyer or borrower to leverage his/her cash equivalents, investments and sometimes even retirement accounts to derive a hypothetical income stream that can be used for qualifying. These assets do not need to be moved or liquidated, just documented. For those who have sufficient net worth but insufficient traditional qualifying income, an asset depletion loan (also known as asset-backed, asset utilization, asset amortization, etc.) can prove an ideal solution.
Bank Statement Qualification
Business owners who show strong income into their business may want to consider a bank statement loan as an alternative to a stated income loan. For a bank statement qualification, we will typically examine 12 months of business bank statements. We’ll total all of the legitimate business deposits and we’ll apply an expense ratio to that sum. The resulting figure is the qualifying income. For those who “write off” a lot of business income on tax returns, a bank statement loan may circumvent that age-old challenge, because for these programs, no tax returns are required.
Debt Service Coverage Ratio (DSCR)
For the real estate investor who will struggle with a conventional mortgage qualification, we now have the debt service coverage ratio, or DSCR, home loan option. This program looks at the property’s income and nets out the housing payment on it. As long as the ratio is positive (and all other qualifying criteria are met), we have a deal.
Another great aspect of alternative lending is that some of the features above can be combined, or other positive aspects of a borrower’s profile can be added. For instance, those who have a lot of equity in real estate may be able to parlay some of it into qualifying income, then combine that with regular asset depletion and circumvent an issue a conventional lender may be having because this same person’s tax returns don’t really show the fair story.
The moral of the story is that there’s a “makes sense” element to approving alternative mortgages and if you feel that the mainstream lending industry hasn’t given you a fair shake, we are here to help match you to a program that sees the light and gets you a great outcome.
Get on the snake,
Rob Spinosa
Senior Vice President of Mortgage Lending
Guaranteed Rate
NMLS: 22343
Cell/Text: 415-367-5959
rob.spinosa@rate.com
Marin Office: 324 Sir Francis Drake Blvd., San Anselmo, CA 94960
Berkeley Office: 1400 Shattuck Ave., Suite 1, Berkeley, CA 94709
*The views and opinions expressed on this site about work-related matters are my own, have not been reviewed or approved by Guaranteed Rate and do not necessarily represent the views and opinions of Guaranteed Rate. In no way do I commit Guaranteed Rate to any position on any matter or issue without the express prior written consent of Guaranteed Rate’s Human Resources Department.
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