Alternative Lending Products

Alternative lending (also known as portfolio, non-QM, and many other names) can be a great option for homebuyers that don’t qualify for a traditional mortgage. Standard underwriting guidelines have strict & mostly unbending rules pertaining to income qualification, down payments, and credit.

These alternative products allow borrowers that may not otherwise qualify (or want to skip the red tape of traditional programs) to purchase or refinance. What’s the catch? These programs typically have higher rates and require larger down payments – in most cases 20% or more. In many cases, these are a short term “band-aid” that allows buyers to get into a home now with the goal of refinancing or paying off the loan when circumstances allow.

So let’s take a look at some of the most common alternative lending options:

  1. Bank statement program. Typically for self employed borrowers that are not showing enough net income on tax returns to qualify for a traditional mortgage, this program looks at average deposits in business or personal bank statements over the last 12 to 24 months to determine qualifying income.
  2. DSCR. DSCR stands for debt service coverage ratio, a metric often used in commercial lending. This product is specifically for investment purchases and refinances. The lender does not look at personal income, but instead bases the approval on the income generated from the subject property (rental income) relative to the proposed mortgage payment. Most lenders require that the rental income be at least 115% to 125% of the mortgage payment including taxes, insurance and HOA fees.
  3. Bridge loan. This product allows homebuyers to “bridge” the gap between a pending home sale and prospective new purchase. In many cases homebuyers will not qualify for a traditional mortgage until their current residence is sold, due to lack of funds and/or debt ratios being too high with multiple mortgage payments. The bridge loan allows buyers to use the equity in their current residence to assist with the purchase of a new home, before the old one sells. Bridge loans are typically have a short (12 month) during which the pending sale of the old home will close, and they can then payoff the bridge loan in full, or refinance into a traditional mortgage.

The above are the most common alternative lending products, but there are near limitless possibilities. As a broker we can access almost every program out there. Give us a call or shoot us an email if we can help 🙂