Get Mortgage After Credit Delinquencies
Get Mortgage After Credit Delinquencies -The Role of Non-QM Loans
For consumers who cannot secure financing through Government-Sponsored Enterprises (GSEs) or government channels, Non-QM loans play a crucial role. Non-QM loans are mortgages that do not comply with the standard Qualified Mortgage (QM) rules set by the Consumer Financial Protection Bureau (CFPB). While QM loans typically require the borrower’s debt-to-income (DTI) ratio to be 43% or less, Non-QM loans often permit a higher DTI, sometimes up to 50% or even 55%.
Non-QM Loans allow you to get mortgage after credit delinquencies. Non-QM underwriting is characterized by its reliance on manual review and flexibility, assessing the borrower’s “Ability-to-Repay” (ATR) based on a comprehensive review of their financial picture, rather than relying solely on traditional documentation like W-2s and tax returns.
Credit Events and Seasoning Requirements
Traditional loans (Government and Conventional) impose a mandatory waiting period after significant derogatory credit events like bankruptcy or foreclosure. In contrast, Non-QM guidelines are designed to accommodate borrowers with recent credit events, often having no waiting period or significantly reduced waiting periods, depending on the loan program and borrower profile.
Credit decisions are based on several factors, including credit scores, down payment amount, type of property, and the required seasoning period from the housing event.
A. Seasoning for Major Credit Events
Major derogatory credit events generally include foreclosure, short sale (SS), deed in lieu of foreclosure (DIL), loan modification due to default, notice of default (NOD), single bankruptcy, and being 120+ days delinquent.
Different Non-QM programs offer tiered eligibility based on the time elapsed (seasoning) since the event’s completion, discharge, or dismissal date:
| Program/Program Tier | Seasoning Requirement (Housing Event/Bankruptcy) | Key Restrictions/Notes |
| Prime Non-QM Series | No seasoning required for a single Housing Event, provided it is settled prior to close and is not a bailout for the subject property. | 12 months seasoning required for Bankruptcies (Chapter 7 or 13 discharge/dismissal). |
| Edge Standard | 2 years seasoning (or 1 year with additional Loan-Level Price Adjustment/LLPA applied). | Must have 0x30x12 housing history if seasoned less than 4 years. LOE required for events less than 4 years. |
| Advantage Standard/Expanded | 24 months (2 years) seasoning required for Short Sale, Foreclosure, Bankruptcy, and DIL, applicable up to a maximum 80% LTV. | 4 years seasoning applies if LTV is greater than 80%. |
| Sharp Standard | >=24 months (2 years) clean history. | Must also have mortgage history of 2x30x12 and 1x60x24. |
| Sharp Premium | >=36 months (3 years) clean history. | Must also have mortgage history of 1x30x12. |
| Edge Elite | 4 years seasoning required. | LOE required for any recent credit event less than 4 years. |
| Horizon Elite Jumbo/Horizon DSCR | 4 years seasoning required. | Horizon DSCR permits seasoning down to 24 months (2 years) but generally requires an LTV reduction (e.g., Max 75% LTV Purchase). |
| Asset Qualifier Loans (Connect) | 5 years seasoning required for Significant Derogatory Credit Events. | N/A |
| First-Time Homebuyers (Horizon) | >= 7 years seasoning required. | N/A |
Multiple Credit Events: Borrowers with multiple unrelated major credit events within the last seven years may be subject to additional restrictions. Some programs explicitly state that borrowers with unrelated multiple significant credit events are ineligible. Furthermore, multiple bankruptcies, regardless of seasoning, are often ineligible.
B. Mortgage and Housing Delinquencies
When reviewing credit history, underwriters evaluate the borrower’s repayment record for debt obligations.
- Recent Delinquency: Many Non-QM programs specify a lookback period for housing payments. For instance, the Horizon Non-QM Standard/Expanded generally permits a maximum delinquency of 1x30x12 (one instance of a 30-day late payment in the past 12 months). However, borrowers with 3x30x12 (three 30-day late payments in the past 12 months) may be considered if they are 0x30 in the most recent six months and take a 10% reduction in maximum LTV.
- Written Explanation: A written explanation (LOE) from the borrower is typically required for derogatory credit information, especially for housing events and bankruptcies in the most recent two years, to determine if the issues were due to extenuating circumstances or financial mismanagement.
- Housing Payment Verification: A 12-month housing history is generally required. This history can be verified through the credit report, canceled checks, bank debits, or an institutional Verification of Rent (VOR) or Verification of Mortgage (VOM).
C. Forbearance and Modifications
A mortgage modification due to default is considered a derogatory housing event subject to seasoning requirements.
Specific guidelines exist for forbearance plans, often depending on whether the plan was tied to the COVID-19 period (01/01/2020 to 06/01/2022).
- Ineligibility: Borrowers still in forbearance are generally ineligible.
- Post-Forbearance Eligibility: If a borrower completed a forbearance plan, eligibility depends on the subsequent payment history:
- Purchase & Rate/Term Refinance: Often requires three (3) consecutive months of timely payments since completing the forbearance plan.
- Cash-Out Refinance: Requires six (6) months or sometimes twelve (12) consecutive months of timely payments since completing the forbearance plan.
- Deferred Payments: If a loan that had a payment deferral is refinanced, and the deferred amount is included in the new loan, it is typically eligible as a rate/term transaction and the deferred portion is not considered cash out.
- Required Documentation: The loan file must contain documentation that the forbearance plan has been terminated, along with a letter of explanation from the borrower detailing the reason for the forbearance and confirming that the hardship no longer exists.
Handling Judgments, Liens, and Collections
Even if a borrower has prior derogatory credit, certain open liabilities may need to be addressed before or at closing.
- Judgments and Liens Affecting Title: All judgments affecting title or liens against the property generally must be paid off prior to or at closing. Title must ensure the lender’s lien position without exception. Cash-out proceeds may sometimes be utilized for this purpose.
- Tax Liens/Repayment Plans: Outstanding tax liens may remain open under specific conditions, such as: being on a repayment agreement, documenting 6 months (or sometimes 3 months) of timely payments, including the payment in the DTI calculation, and ensuring the lien is subordinated if recorded against the property.
- IRS tax payment plans approved by the IRS are permitted provided they are current and do not carry a lien on any property.
- Collections and Charge-Offs: Non-title charge-offs and collections are often permitted to remain open if the balance is low or if the account is medical-related.
- For the Sharp Series, non-title charge-offs and collections open less than three years and exceeding $5,000 (individually or in aggregate) must be paid. Medical collections less than $15,000 (or up to $50,000 in some Edge programs) are typically exempt from this payoff requirement.
- For the Horizon Series (Non-DSCR), collections and charge-offs less than 24 months old with a maximum cumulative balance of $5,000 may remain open.
- Disputed Accounts: An open derogatory dispute may render a credit report invalid, and all derogatory disputes must be resolved before the loan can close. Depending on the severity of the disputed account, the borrower may need to remove the dispute and pull a new credit report.
Qualifying for Alternative Loans
Non-QM loans enable borrowers with complicated financial histories to qualify using alternative documentation methods, which may be beneficial if their taxable income is low due to business write-offs, or if they rely on assets.
Examples of alternative Non-QM loan qualification types include:
- Bank Statement Loans: Designed for self-employed individuals (often requiring 12 or 24 months of statements) to verify cash flow rather than relying on tax returns.
- Asset Depletion Loans: Allow borrowers (such as retirees or high-asset, low-income individuals) to calculate qualifying income by liquidating their assets (like savings or investments) over a specific period, such as 84 months (7 years).
- DSCR (Debt Service Coverage Ratio) Loans: Primarily for real estate investors, these loans qualify the borrower based on the cash flow generated by the investment property itself (rental income vs. debt obligations), rather than the borrower’s personal income or DTI.
FAQ's
Non-QM lenders offer more flexible DTI ratios than Qualified Mortgages (which are capped at 43%,), often approving borrowers with a DTI of 50% or lower. Some programs may accept DTI ratios up to 55%.
Down payment requirements generally range from 10% to 30%. Specifically, borrowers with credit scores under 660 typically require a 20% down payment.
Under our Advantage Standard/Expanded program, a minimum seasoning of 24 months (2 years) is required for foreclosure, short sale (SS), Deed-in-lieu (DIL), and bankruptcy, provided the loan has a maximum Loan-to-Value (LTV) of 80%
The maximum housing delinquency permitted for our Advantage Standard/Expanded program is 1x30x12 (one 30-day late payment in the past 12 months)
Homeowners with Non-QM loans can consider refinancing to FHA or Conventional loans to see if they can qualify for a lower interest rate after the negative credit history has faded into the past
All delinquent credit, including judgments or liens that will impact title or affect the lender’s lien position, must be paid off prior to or at closing
Lenders must follow the Ability to Repay (ATR) rule by making a good-faith effort to determine that the applicant has the capacity to repay the mortgage
The primary drawback is that Non-QM loans typically come with higher interest rates compared to traditional mortgages, as the higher rate compensates the lender for the increased risk associated with the borrower’s unique financial history
Yes, Non-QM loans often have no waiting period required after significant credit events like bankruptcy or foreclosure, making financing accessible sooner than traditional loans. Some lenders may even allow a borrower to get a Non-QM loan as soon as a day after the event is finalized.
Borrowers with past financial issues, such as bankruptcy or foreclosure, often benefit from Non-Qualified Mortgage (Non-QM) loans. These loans offer flexibility for those who do not meet the stringent standards of Qualified Mortgages.
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