Flexibility to Non-QM Lenders Regarding DTI Ratio
QM Standard vs. Non-QM Flexibility
The primary driver for DTI flexibility in the Non-QM market is the structure of the Qualified Mortgage (QM) rule, which mandates rigid limits. Non-QM programs, however, offer greater Flexibility to Non-QM Lenders Regarding DTI Ratio (Debt-to-Income) , allowing lenders to evaluate a borrower’s overall financial strength rather than relying solely on strict DTI caps.
- QM DTI Limit: Under the Dodd-Frank Act, a key criterion for a Qualified Mortgage (QM) is that the borrower’s DTI ratio must typically be 43% or less.
- Non-QM Differentiation: A loan that does not comply with the QM rules is defined as a Non-QM loan. One of the main reasons Non-QM loans fail to meet QM standards is due to DTI ratios for a mortgage above 43%, accounting for 26% of Non-QM loans that did not meet QM standards in 2024.
- General Non-QM Limit: Non-QM lenders offer significantly looser DTI rules. While the average DTI for Non-QM loans was 38% in 2024 (compared to 36% for QM loans), most Non-QM loan programs generally cap the DTI ratio at 50%.
- Rising Trend: The proportion of Non-QM loans with DTI ratios exceeding 43% increased by 12 percentage points from 2020 to 2024.
Programs and Exceptions for Higher DTI
Certain Non-QM products offer DTI limits that stretch beyond the standard 50% threshold to accommodate specific borrower types, particularly self-employed individuals with high expenses or those utilizing co-borrowers.
Program/Scenario | Maximum DTI Allowed | Notes on Eligibility |
Standard Alt Doc / Full Doc (our Advantage/Connect) | 50% | This is the maximum DTI permitted for Full Doc, Bank Statement, 1099 Only, and P&L Statement Only products, with no exceptions allowed for exceeding 50%. |
Our Horizon Standard/Expanded | 50% | Allows DTI up to 50%. For 40-Year Fixed products, the borrower must qualify at below 50% DTI using the 40-year amortization payment, AND below 55% DTI using the 30-year amortization payment. |
FNBA (First National Bank of America) | Up to 60% | FNBA’s Non-QM loans accept DTI ratios up to 55% and offer DTI up to 60%. |
Non-Occupant Co-Borrower | Max 60% | When using blended ratios with a Non-Occupant Co-Borrower on a primary residence, the occupying borrower must have a maximum DTI ratio of 60% (the non-occupant’s debt/income are blended to determine the final back-end ratio). |
Our Sharp Expanded | Up to 55% | DTI up to 55% is permitted, but requires a minimum FICO score of 700 or greater and a maximum LTV of 80%. |
Asset Utilization (Supplemental) | Max 45% | When Asset Utilization is used as a supplemental source of income (not the sole source), the maximum DTI is restricted to 45%. |
Our Horizon Elite Jumbo | Max 38% | This specialized jumbo program for high-net-worth borrowers imposes a stricter DTI cap of 38%. |
First-Time Homebuyer (River Series) | Max 45% | First-Time Homebuyers using the River Bank Statement program are limited to a maximum 45% DTI. |
Programs Where DTI Is Not Calculated
For specific Non-QM products designed for non-traditional qualification, the DTI ratio calculation is waived entirely, demonstrating the ultimate flexibility:
1. DSCR (Debt Service Coverage Ratio) Loans: DTI is not developed for the Investor Cash Flow (DSCR) products. These loans qualify the borrower based solely on the property’s cash flow (DSCR) for investment properties.
2. Asset Qualifier Loans: DTI is not developed for the Asset Qualifier product. This program qualifies borrowers based on their liquid assets rather than traditional income or debt ratios.
DTI Calculation Details and Compensating Factors
Even when a DTI is calculated, Non-QM lenders have flexible rules regarding what debts are included and how the payment is determined:
- Residual Income: Non-QM programs often require a minimum Residual Income when the DTI exceeds 43%. For example, the our Connect program requires Residual Income for all non-DSCR products, with higher minimums for Alt Doc borrowers (e.g., $2,500 for Bank Statement, 1099 Only, and P&L Only borrowers).
- Interest-Only Loans: When financing includes an Interest-Only (IO) feature, the loan cannot be qualified at the interest-only payment for DTI purposes (unless it is a DSCR loan). The DTI calculation must use the higher fully amortizing principal and interest payment over the remaining term.
- Business Debt Exclusion: Debts reflected on the borrower’s personal credit report may be excluded from the DTI ratio if the borrower provides sufficient evidence (often 6 or 12 months of payments) that the obligation was paid out of company funds.
- Compensating Factors: To mitigate the inherent risk associated with high DTI ratios (over 43%), we often offset this risk by focusing on borrowers with higher credit scores and lower Loan-to-Value (LTV) ratios.
FAQ's
Yes. Some specific programs, such as our Sharp Expanded product, allow DTI ratios up to 55% with certain requirements (like a minimum 700 FICO and maximum 80% LTV). Other programs may offer DTI up to 60% or a Max DTI of 60% for the occupying borrower when using a Non-Occupant Co-Borrower in a bank statement program.
When Asset Utilization is used as a supplemental source of income (not the sole source), the maximum DTI is restricted to 45%.
Yes. If debt is reflected on the borrower’s personal credit report but is being paid by the borrower’s business, it can be excluded from the DTI ratio if documentation shows the obligation was paid out of company funds (e.g., 6 months of payments).
Many programs require a borrower to meet a minimum monthly Residual Income requirement when the DTI is over 43% for owner-occupied and second homes.
To offset the risk associated with high DTI ratios, lenders generally focus on borrowers with higher credit scores and lower Loan-to-Value (LTV) ratios.
The loan cannot be qualified at the interest-only payment for DTI purposes (unless it is a DSCR loan). The DTI calculation must use the fully amortizing principal and interest payment over the remaining amortization period.
The DTI ratio is not developed (or calculated) for Investor Cash Flow (DSCR) products and Asset Qualifier loans, as qualification is based on property cash flow or liquid assets, respectively.
The average DTI for Non-QM loans was 38%, which is slightly higher than the 36% average for QM loans.
Most Non-QM programs allow borrowers to carry higher levels of debt, typically capping the DTI ratio at 50%. In 2024, DTI ratios for a mortgage above 43% were the reason 26% of Non-QM loans did not meet QM standards.
Qualified Mortgages (QM) generally require the borrower’s DTI ratio to be 43% or less.
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