Foreign buyers purchased over $59 billion worth of US residential property last year, according to the National Association of Realtors (NAR), demonstrating the immense potential for international investors in the American Real Estate Market. However, navigating the financing landscape can be a challenge for foreign nationals, especially when it comes to securing a mortgage that suits their unique needs.
Enter the world of non-QM loans, a specialized financing option designed to accommodate borrowers who may not fit the traditional loan mold. In this blog post, we will dive into the intricacies of non-QM loans, revealing how they can unlock investment opportunities for those seeking to capitalize in the US rental property market.
What Are Non-Qualified Mortgages (Non-QM Loans)?
Non-Qualified Mortgages (Non-QM loans) are mortgage products that do not conform to the strict guidelines established by the Consumer Financial Protection Bureau (CFPB) for Qualified Mortgage Loans (QMs). This type of loan offers greater flexibility in underwriting standards then those offered by mortgage lenders following rules set by the FHA, Fannie Mae, or Freddie Mac.
These more flexible eligibility criteria can provide foreign investors with access to financing that might be otherwise unattainable through the credit requirements of traditional mortgage products. By catering to a diverse range of real estate investor needs, these loans serve as a valuable tool for unlocking investment opportunities in the US.
Features of a Non-QM Mortgage Loan
The key features of non-QM home loans often include:
- Flexibility in Underwriting Guidelines: These loan options offer alternative underwriting standards, accommodating non-traditional income sources and credit profiles. This flexibility makes it easier for foreign nationals to qualify for investment property financing.
- No FICO Score Requirement: Non-QM loans do not require a FICO score for approval, making them an attractive option for investors who may not have an established credit history in the United States.
- Access to Financing for Various Property Types: Loan programs may cater to a range of property types, including single-family rentals (SFRs), vacation and short-term rentals (STRs), and small multi-unit properties, enabling investors to diversify their portfolios.
- Potential for Higher Loan Amounts: May allow for higher loan amounts than traditional mortgage products, providing additional financing options for investors seeking larger or more expensive properties.
- Option to Use Discount Points: Borrowers can purchase discount points to lower the mortgage interest rate, potentially saving thousands of dollars over the life of the loan.
- Prepayment Options: Some offer prepayment options, allowing borrowers to repay their home purchase loans early, which can save on interest costs.
- Separate from Personal Credit Rating in Origin Country: Can be structured as business financing using a US entity like an LLC.
There are some potential risks that borrowers should be aware of as well. Some lenders may offer loans with variable rates or interest-only options. Adjustable interest rates can fluctuate over time and create uncertainty for borrowers regarding future mortgage payments. Additionally, interest-only payment options, while initially attractive, can result in negative amortization if the borrower’s payments do not cover the full interest amount, causing the loan balance to increase rather than decrease.
This option offers several advantages, including predictable monthly payments, protection against interest rate fluctuations, and loan amortization to steadily reduce the principal balance over time. This structure also helps to ensure that borrowers build equity in their property and ultimately work towards full ownership.
How To Qualify for a Non-QM Loan
Qualifying for a non-QM loan as a foreign national involves meeting specific eligibility criteria and providing the necessary documentation. While each lender may have their own set of requirements, we will outline the general guidelines used by Lendai.
Lendai’s underwriting guidelines are designed to carefully evaluate loan applications and determine the suitability of borrowers for non-QM loans. The guidelines are based on four main factors that contribute to a comprehensive assessment of the borrower’s financial stability and creditworthiness.
- Property Value: Lendai considers the market value of the property being financed, as determined by a licensed appraiser. A property’s value is crucial in establishing the Loan-to-Value (LTV) ratio, which affects the borrower’s eligibility and loan terms. Lendai offers loans with up to 75% LTV, depending on the property type and borrower’s financial profile and income verification.
- Property Debt Service Coverage Ratio (DSCR): The DSCR measures the property’s ability to generate enough rental income to cover the mortgage payments, taxes, and insurance premiums. Lendai evaluates the property’s DSCR to ensure that the investment generates sufficient cash flow to meet the borrower’s loan obligations.
- Borrower‘s Liquidity: Lendai considers the borrower’s liquidity, which includes cash reserves and other liquid assets, to ensure they can cover several months of mortgage payments, taxes, and insurance premiums. Sufficient liquidity provides a safety net for borrowers and reduces the risk of default in case of unforeseen circumstances or fluctuations in rental income.
- Borrower‘s Credit Profile in the Country of Origin: While a US credit score may not be required for non-QM loans, Lendai still assesses the borrower’s credit profile in their home country. Foreign nationals can provide a credit report from their country of origin, or alternative credit references and tax returns, to demonstrate their credit responsibility and repayment history.
Tips for Selecting Non-QM Loans
Non-QM loans present both opportunities and challenges for investing in the US rental market. These loans offer flexible underwriting guidelines, access to financing for various property types, and potential for higher loan amounts. However, they may also have limited availability, because not all lenders offer non-QM loans or are willing to work with foreign investors.
To successfully navigate the non-QM loan process, consider the following tips:
- Research and Compare Different Non-QM Lenders: Not all non-QM lenders are created equal. Take the time to research various lenders, compare their loan products, interest rates, fees, and underwriting guidelines to find the best fit for your investment needs and particularities.
- Ensure Complete and Accurate Documentation: Providing complete and accurate documentation is crucial for a smooth loan approval process. Be prepared to submit valid identification, proof of income, foreign credit reports or alternative credit references, bank statements, and a property appraisal report.
- Build a Strong Credit Profile: Although a US credit score may not be required for non-QM loans, a strong credit profile in your home country can improve your chances of securing favourable loan terms and interest rates. Establish a good credit history by paying bills on time, reduce high debt levels to maintain a reasonable debt-to-income ratio (DTI), and manage your credit responsibly.
- Plan for Additional Costs: Be prepared for additional costs associated with purchasing a US rental property, including closing costs, property taxes, insurance premiums, and property management fees. Factor these expenses into your investment calculations to help ensure a profitable venture.
- Stay Informed About Market Trends: Keep up-to-date with US real estate market trends, interest rates, and regulatory changes that may impact your investment decisions and financing options.
- Work with an Experienced Real Estate Agent and Lender: Partnering with a knowledgeable real estate agent and lender who specializes in working with foreign nationals can be invaluable. They can help you identify suitable properties, navigate the loan process, and ensure that all required documentation is in order.
By following these tips, we hope you, as a foreign investor can better navigate the non-QM loan process and secure the financing needed to invest in the US rental property market successfully. If you want to keep learning about a Non-QM Loan journey, stay tune for future articles where we’ll cover the process of selling Non-QM Loan in capital markets.