The Consumer Protection Act was signed into law after the housing crisis. This mortgage reform created minimum standards for mortgages, such as; loans may not contain negative amortization, prepayment penalties, interest only, balloon payment features, a term exceeding 30 years, and the debt to income ratio may not exceed 43%.
Many self-employed borrowers who have claimed more deductions on their tax returns may not be able to qualify for loans. This is often also an issue for a stock market investor whose income derives from investments in the market.
Lenders use computers to decide whether to approve a loan, which do not take these considerations into account. If you have credit issues or own a business (in which case, your tax returns tend to not show the whole picture), you’ll most likely get instantly disqualified.
Some lenders offers “non-QM loans” which do not need to meet the rules. Those loans have specific rules to determine income qualification. Higher credit scores are often a plus if you are looking for a non-QM loan.
Non-qualified mortgage lending, or Non-QM loans, have become more popular lately due to its flexibility on the rules and guidelines.
By using a Non-QM loan with underwriting, or manual acceptance, it’s easier for people who are self-employed to borrow, and Non-QM loans are becoming more and more commonplace.
It’s important to remember that non-QM loans are not government-backed mortgages, and will correspondingly have higher interest rates. Most of investors will keep the loans in house as portfolio loans.