Credit Requirements for Challenged Credit

The Non-QM Context for Challenged Credit

Traditional Qualified Mortgages (QM) impose strict rules, including a Debt-to-Income (DTI) ratio capped at 43%, and require a good credit history with no delinquencies or foreclosure within the last three years. Credit Requirements for Challenged Credit are more flexible under Non-QM Loans, giving borrowers with past credit issues, limited history, or recent financial setbacks a more attainable pathway to qualify.

Non-QM loans offer greater flexibility for borrowers whose situations do not fit these traditional norms. These mortgages generally feature less stringent requirements concerning DTI, down payment, and repayment schedules. Non-QM lenders evaluate the borrower’s credit profile, encompassing their history of repayment, capacity to manage debt, liquidity, and the collateral being secured.

For borrowers with credit challenges, Non-QM loan programs generally:

Have average minimum credit scores ranging from 500 to 620.
May allow higher Debt-to-Income ratios, often approving mortgages for borrowers with a DTI of 50% or lower. The maximum DTI is generally limited to 50% across several our programs.
May consider borrowers with blemishes on their financial history, low credit scores, or those who have experienced bankruptcy, often via portfolio loans.

Minimum FICO Score Requirements

Minimum FICO scores vary significantly depending on the specific Non-QM product selected and the loan’s characteristics (e.g., loan amount, occupancy, and documentation type).Application Checklist and Preparation

Our Program / Category	Minimum FICO Score	Specific Conditions
Edge Standard / Standard AUS	620	General minimum FICO for these programs.
Advantage (General)	620	Minimum representative score for all borrowers.
Edge Elite / Elite AUS	660	General minimum FICO for these programs.
Sharp Expanded	660
Horizon Standard/Expanded	660	General minimum FICO for this specific Horizon program.
NQM Funding Flex Supreme (Asset Depletion)	680	Minimum score required for this specific asset depletion program.
Horizon Elite Standard/Expanded	680	Minimum credit score required.
DSCR Loans (General)	640–680	Minimums vary by lender, commonly ranging as high as 680 or as low as 640.

In general, the lowest usable score of all borrowers is determined by the middle score when three credit agencies report, or the lower score when only two agencies report. For DSCR products, the lowest representative score of all borrowers is typically used.

Handling Major Derogatory Credit Events

Derogatory housing events generally include Foreclosure, Short Sale, Deed in Lieu, Default Modification, Notice of Default, or 120+ Days Delinquent status, as well as Bankruptcies (Chapter 7, 11, and 13). Non-QM guidelines often address challenged credit by requiring specific seasoning periods from the completion, discharge, or dismissal date of the event.

Event Type	Program & Seasoning Requirement	Notes
Foreclosure/SS/DIL/BK	24 months seasoning: Non-QM Advantage (Max. 80% LTV).	Some Advantage scenarios require 36 months seasoning.
Foreclosure/SS/DIL/BK	3 years seasoning: Edge Investor Classic DSCR; River DSCR (since discharge/dismissal/completion date); Horizon DSCR No Ratio.	NDM Prime Non-QM requires 3 years seasoning if there are multiple events.
Foreclosure/SS/DIL/BK	4 years seasoning: Edge Investor Edge Elite; Horizon Elite Jumbo; Sharp Expanded (requires >=48 months clean history).	Borrowers must have reestablished acceptable credit post-event.
Bankruptcy (Chapter 13)	Must be discharged or dismissed 2+ years for Horizon DSCR No Ratio. Minimum 1 year discharged used for seasoning for Horizon DSCR.	Seasoning for single bankruptcy (Ch 7, 11, 13) is based on discharge or dismissal date.
Multiple Events	Ineligible: Multiple bankruptcies are ineligible regardless of seasoning (Edge Series). Borrowers with unrelated multiple significant credit events are ineligible (Horizon/Elite Jumbo).

If a borrower has a credit event seasoned less than four years (Edge), they must show 0×30×12 (no 30-day lates in the most recent 12 months).

Housing Payment History and Delinquency Standards

A review of the borrower’s housing payment history is critical.

Program / Requirement	Standard	Exception / Condition
Sharp Expanded	0×30×12	Clean mortgage history (no 30-day lates in the last 12 months).
Horizon Elite Jumbo	0×30×24	No 30-day late payments in the past 24 months.
Edge Elite	0×30×12 or 1×30×12	The 1×30×12 standard requires an additional loan-level price adjustment (LLPA).
Edge Standard	0×60×12	May permit up to a 60-day late payment in the last 12 months.
Sharp Standard	2×30×12 and 1×60×24	Permits a higher degree of historical delinquency.
DSCR Loans (Horizon)	1×30×12 (Max)	The combined housing payment history must not exceed 1×30 in the past 12 months if the DSCR is 0.75 or greater. DSCR No Ratio loans require 0×30×12.
General Housing Status	All borrowers must be current on mortgage or rent at the time of loan application. If delinquent taxes exist for more than one year, it requires an investor exception review.	If a mortgage or rental history is not reported on the credit report, alternative documentation showing the most recent 12 months’ history is required.

Collections, Judgments, and Tax Liens

Rules for non-mortgage derogatory accounts vary by program:

Judgments and Liens: All judgments or liens affecting title must generally be paid in full. IRS tax payment plans approved by the IRS are permitted if they are current and do not carry a lien on the property.
Non-Title Charge-offs and Collections:
- Edge Series requires non-title charge-offs and collections open less than two years and greater than $10,000 (individually or aggregate) to be paid.
- For the Horizon DSCR No Ratio Program, non-title charge-offs and collections within three years and exceeding $5,000 (individually or aggregate) must be paid.
Medical Collections:
- Edge and Sharp programs state that medical collections less than $50,000 are not required to be paid.
- The Horizon DSCR No Ratio Program generally exempts medical collections under $15,000 from mandatory payoff.
- Nations Direct Mortgage permits medical collections to remain open regardless of amount.
Disputed Accounts: Derogatory disputed accounts must generally be resolved, requiring an updated credit report before closing. Exceptions exist for minor disputed collection accounts (e.g., balance ?$250).

Forbearance and Credit Rescoring

Forbearance Eligibility

Borrowers who have used mortgage forbearance programs may be eligible, provided they have successfully completed the plan and reestablished timely payments.

If all payments were made as originally scheduled throughout the forbearance period, borrowers are eligible under standard guidelines once the account is reinstated.
If payments were missed due to forbearance:
- Connect requires the account to be reinstated and three consecutive monthly payments must be made prior to the application date.
- Edge Series (for non-financial hardships, like natural disasters) requires completion of the program and 2 months of payments for Purchase/Rate-Term Refinance, or 6 months of payments for Cash-out Refinance.
Ineligible Status: Borrowers who are still in active forbearance or who received a rate modification or principal forgiveness as part of a restructuring are generally not eligible.

Credit Rescoring

Credit rescores are generally permitted only to address specific errors or pay down/pay off existing debts to improve qualification. Using rescoring simply to increase the score to qualify is often not permitted for owner-occupied or second home transactions, unless correcting an error.

Minimum Tradeline Requirements

Borrowers must demonstrate an established credit history, typically validated through tradeline requirements.

Standard Requirement (Connect, Horizon, Nations Direct): Each borrower must have three tradelines with a credit history covering 24 months, or meet specific alternatives such as:
Minimum three tradelines reporting for 12+ months, with one active in the last 12 months.
Minimum two tradelines reporting for 24+ months.
Exclusions: Authorized user accounts are generally not considered an acceptable tradeline for meeting minimum requirements.

By us utilizing Non-QM programs provide a path for individuals with challenged credit histories by offering flexibility in scoring, DTI, and documentation, while still rigorously assessing the borrower’s capacity and willingness to repay the debt.

FAQ's

What minimum seasoning period is required for a foreclosure, short sale, or bankruptcy under our Non-QM Advantage program (at an 80% LTV)?

A seasoning period of 24 months (two years) is required for foreclosure, short sale, bankruptcy, or deed-in-lieu, if the maximum Loan-to-Value (LTV) is 80%.

What are the minimum tradeline requirements for a borrower under our Prime Non-QM Series?

A borrower must have a minimum of three (3) trade lines from traditional credit sources that reported for 24 months or more, with at least one (1) open and active for the last 12 months.

What action is required if a borrower has an open derogatory dispute listed on their credit report?

The credit report is not considered valid if there is an open derogatory dispute. All derogatory disputes must be resolved and an updated credit report received before the loan can close.

How do lenders handle collection accounts or judgments that directly affect the property title?

All judgments affecting title or liens affecting title must be paid. The lender’s lien position must be ensured without exception.

What are the typical maximum Debt-to-Income (DTI) ratios allowed under Non-QM guidelines?

While traditional Qualified Mortgages (QM) cap DTI at 43%, Non-QM lenders are often able to approve borrowers with a DTI of 50% or lower. Some products may allow DTI up to 60%.

If a borrower applies for a Non-QM Asset Qualifier loan, what is the required seasoning for a significant derogatory credit event?

For Asset Qualifier transactions under the Non-QM Connect guidelines, the seasoning required for a Significant Derogatory Credit Event (BK/FC/SS, etc.) is five (5) years.

How is eligibility calculated for a borrower who has previously gone through foreclosure or bankruptcy?

Eligibility is determined by the seasoning period (waiting period) that has elapsed since the credit event. Some Non-QM programs even offer no waiting period after a housing event for qualified individuals.

What mandatory federal standard must a lender meet when approving any Non-QM loan, regardless of the borrower's credit history?

The lender must make a good-faith effort to confirm the borrower’s Ability-to-Repay (ATR) the mortgage debt, as required by the Dodd-Frank Act and Regulation Z.

What is the typical minimum FICO score range required for a borrower to qualify for a Non-QM loan?

While requirements vary by product, the average minimum credit score needed to qualify for a Non-QM loan is often between 500 and 620.

What specialized loan product is designed for borrowers whose credit profiles do not meet standard guidelines?

Borrowers whose financial profiles do not fit the norm, such as those with past credit events or non-traditional income, typically seek Non-Qualified Mortgage (Non-QM) loans.

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