Down Payment Requirements for Credit Challenged Borrowers
General Non-QM Down Payment Ranges
Non-QM loans generally require a higher down payment than traditional financing methods. The down payment requirements typically range from 10% to 30% of the purchase price, depending heavily on the perceived risk associated with the borrower.
The down payment requirements for credit challenged borrowers is determined by several factors, including the borrower’s credit score (FICO), the type of property, and the seasoning (longevity) of any prior credit event. We often focus on achieving a lower Loan-to-Value (LTV) ratio (meaning a higher down payment) to balance the risks inherent in Non-QM lending, such as higher Debt-to-Income (DTI) ratios or alternative documentation.
Down Payment Requirements Based on Credit Score
While minimum credit scores vary by program (from 500 up to 700+), certain tiers directly correlate the required down payment to the FICO score:
- For borrowers with 680 credit scores, a 10% down payment (90% LTV) may be required for a home purchase.
- For borrowers with a 660 credit score, a 15% down payment (85% LTV) is required.
- For borrowers with credit scores under 660, a 20% down payment (80% LTV) is required.
Down Payment Requirements After Significant Derogatory Events
For borrowers who have experienced a Significant Derogatory Credit Event (such as foreclosure, short sale, or bankruptcy), the required down payment often increases, particularly if the event is recent.
- 1 Day After Foreclosure/Bankruptcy: Non-QM mortgages sought just one day out of bankruptcy and/or foreclosure require a significant 30% down payment (Max 70% LTV).
- Seasoned Events (Advantage Program): For events like foreclosure, short sale, deed-in-lieu (DIL), and bankruptcy, a minimum seasoning of 24 months (2 years) is generally required to achieve an 80% LTV (20% down payment).
Down Payment for Alternative Qualification Products
Specialized Non-QM products designed for unique financial profiles also enforce specific down payment minimums, reflecting the perceived risk profile of the borrower and the documentation type used.
A. Investor DSCR Loans
DSCR loans are intended for investment properties and qualify based on the property’s rental cash flow, not the borrower’s personal income. Down payment requirements vary based on the strength of the property’s cash flow (DSCR ratio):
- General Requirement: Most lenders require a down payment of 20% to 25% for DSCR loans.
- Minimum Down Payment: Some programs allow down payments as low as 15% (Max 85% LTV).
- DSCR Ratio Impact:
- If the Debt Service Coverage Ratio (DSCR) is 1.00 or higher (indicating positive cash flow) on loans ? $1,000,000, a minimum 15% down payment (Max 85% LTV) is typically required alongside a 740 credit score.
- If the DSCR is less than 1.00 (indicating negative cash flow), a minimum 25% down payment (Max 75% LTV) is required, even if the loan amount is ? $1,000,000. This higher down payment is required because the property may have potential for negative cash flow.
B. Asset Depletion Loans (High-Asset Borrowers)
Asset Depletion loans are designed for high-asset, low-income borrowers (often retirees).
- Asset Depletion/Asset Qualifier loans under our Connect program for a primary residence are limited to a Max LTV of 75% (requiring a 25% down payment).
- Borrowers considering asset depletion programs often need to have 25% to 30% for the down payment.
Restrictions on Down Payment Sources (Minimum Borrower Contribution)
Non-QM guidelines often mandate that a certain portion of the down payment must originate from the borrower’s own verified funds, even if gift funds are utilized for the remainder of the closing costs.
A. Minimum Contribution Requirements
- Prime Non-QM Series: A minimum of 3% of the purchase price must come from the borrower’s own seasoned funds.
- Edge Gift Funds: For purchase transactions with an LTV greater than 75%, the borrower must have 5% of their own funds documented.
- If the borrower has no housing history, they must have 10% of their own funds documented, although these funds are not necessarily required to be used toward the down payment if they are instead used for reserves.
- Horizon DSCR and No Ratio Programs: Gift funds are permitted only after a minimum 10% borrower contribution has been met, regardless of the LTV.
- First-Time Homebuyers (FTHB) with Incomplete History (Connect Program): FTHBs who cannot document a complete 12-month housing history or are living rent-free must adhere to a 10% minimum borrower contribution requirement.
B. Gift Fund Eligibility
Gift funds are generally permitted for down payment and closing costs, but restrictions apply to prevent undisclosed debt or non-arm’s length transactions:
- Eligible Use: Gift funds may be used for down payment and closing costs on owner-occupied and second homes when the LTV is ? 80%.
- Reserve Restriction: Gift funds cannot be used to meet reserve requirements.
- Foreign National Restriction: Gift funds are not eligible for Foreign National borrowers.
- Documentation: Gift funds must be verified, requiring a signed gift letter detailing the donor’s relationship, address, phone number, and a certification that the money is an outright gift with no repayment required. Evidence of the donor’s ability to provide and transfer the funds is also required.
FAQ's
For our Prime Non-QM Series, a minimum of 3% of the purchase price must come from the borrower’s own funds.
The program requires 24 months seasoning to achieve a Max. 80% LTV, meaning a 20% down payment.
For investment property purchase transactions (including Investor Cash Flow), the borrower must contribute 5% of the purchase price from their own funds if the LTV is greater than 75%.
If the DSCR is less than 1.00, a 25% down payment (75% LTV) is required for loans of $1,000,000 or less.
On a DSCR loan of $1,000,000 or less with a DSCR of 1.00 or higher, a 15% down payment (85% LTV) is required.
Borrowers seeking asset depletion mortgages typically need to have 25 to 30 percent for the down payment.
Non-QM mortgages sought one day out of bankruptcy and/or foreclosure require a 30% down payment.
Borrowers with credit scores under 660 are generally required to put down a 20% down payment (80% LTV).
A borrower with a 680 credit score typically requires a 10% down payment (90% LTV) on a home purchase.
Down payment requirements for Non-QM loans typically range from 10% to 30%.
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