Borrowers with Credit Challenges

While immediate financing may be possible in some cases, most Non-QM programs require a period of “seasoning” depending on the severity of the challenge and the loan program used:

• 2 Years (24 months): Some programs permit a seasoning period of 2 years for events like Short Sale, Foreclosure, or Bankruptcy (Chapter 7, 11, or 13) to qualify for mortgages up to 80% LTV.
• 3 Years (36 months): Many DSCR loans and certain manual underwriting programs require 3 years since the discharge or dismissal date of bankruptcy, foreclosure, short sale, or loan modification.
• 4 Years (48 months): Several Non-QM programs (like Edge Elite program) require a seasoning period of 4 years for major housing events (Foreclosure, Short Sale, Bankruptcy).
• 7 Years: If a borrower has multiple derogatory credit events, a waiting period of 7 years may be required.

Non-QM loan eligibility generally includes borrowers with lower credit scores. While the average Non-QM borrower score was 776 in 2024, the minimum accepted FICO score can be much lower for certain programs:

• Lowest Range: The average minimum score cited for qualifying for a Non-QM loan is between 500 and 620.
• Program Specifics: Programs designed to accommodate challenges often start at FICO scores of 620 (for high LTV tiers in our Advantage Standard) or 660 (for River AUS conforming loans and certain DSCR loans).
• Credit Quality Offset: Lenders tend to focus on borrowers with higher credit scores and lower LTV ratios to balance the risks associated with high DTI ratios or limited documentation.

Lenders mitigate the risk of borrowers with credit challenges by requiring higher equity (lower LTV) and substantial down payments.

• Down Payment Range: Down payment requirements for Non-QM loans typically range from 10% to 30%.
• FICO-Based Down Payment: The down payment requirement often correlates with the credit score:
  •     10% down may be required for borrowers with 680 credit scores.
  •     20% down may be required for borrowers with FICO scores under 660.
• Recent Credit Events: Loans granted for borrowers one day out of bankruptcy and/or foreclosure typically require a 30% down payment.

The primary trade-off is higher cost, as Non-QM loans are priced based on the layered risk posed to the lender.

• Higher Rates: Non-QM loans typically have higher interest rates than traditional QM loans. For instance, the average initial 30-year interest rate for Non-QM loans was 6.7% in 2024, compared to 6.4% for qualified mortgages.
• Higher Fees: Non-QM loans can also come with higher fees.
• Risk Compensation: The higher interest rates compensate lenders for the higher risk associated with borrowers who do not meet traditional criteria, such as those with recent credit events or alternative income documentation.

Eligibility depends on the status and type of the event:

• Active Forbearance: Loans that are currently in forbearance or if the borrower is still in forbearance are ineligible for most programs.
• Forbearance/Modification as Derogatory Event: Any forbearance that resulted in a subsequent loan modification, repayment plan, or deferred amount added to the mortgage balance is considered a significant derogatory credit event and subjects the loan to the mandatory seasoning period (e.g., 3 or 4 years).
• Ineligibility: Borrowers who received a rate modification or principal forgiveness are specifically ineligible in some programs.
• Eligibility after Exit: If a forbearance was exited and all subsequent payments have been made on time (generally for 12 months), the event may not be considered a significant derogatory credit event.

Non-QM guidelines specify rules for handling unsecured debt blemishes:

• Judgments and Liens: All judgments or liens affecting title must be paid prior to or at closing. An outstanding judgment may remain open only if the borrower is on a repayment agreement, documents the most recent 6 months of timely payments, and the payment is included in the DTI calculation.
• Collections/Charge-offs: Non-title charge-offs and collections must often be paid if they are open for less than three (3) years and exceed $5,000 (individually or in aggregate).
• Medical Exception: Medical collections of less than $15,000 are generally not required to be paid.

Non-QM lenders assess a borrower’s willingness to repay by looking at their recent payment history.

• Housing History: Even borrowers with prior bad credit often need to show that they have been timely on all of their payments in the past 12 months. Many programs require a history showing only 1×30 in the last 12 months (one 30-day late payment maximum).
• Strict Programs: Higher-quality Non-QM series (like Sharp Expanded) require a clean derogatory housing event history (0x30x12).
• Derogatory Credit: Recent credit events also include recent late payments in the past 12 months or recent collections/charge-offs that have not been seasoned.

Yes, a primary benefit of Non-QM loans is that they often do not require the lengthy mandatory waiting periods imposed by government and conventional loans after significant credit events. Some lenders may allow a borrower to qualify for a Non-QM loan as soon as one day after a foreclosure event is completed. This enables borrowers who are recovering from events like divorce, job loss, or business loss to secure financing quickly and take advantage of the housing market.