Many borrowers in bankruptcy or recently discharged believe they can’t secure mortgage financing. However, the reality is that there are mortgage options available, even during or immediately after bankruptcy. For those navigating the financial challenges of bankruptcy, Non-QM loans (Non-Qualified Mortgages) provide flexible and accessible mortgage options, often with fewer barriers than traditional mortgage programs.
Let’s explore how Non-QM loans can help individuals with bankruptcies regain their footing in the housing market.
What is a Non-QM Loan (Non-Qualified Mortgage)?
A Non-QM loan is a mortgage that doesn’t conform to the typical requirements set by the Consumer Financial Protection Bureau (CFPB) under qualified mortgage (QM) standards. Non-QM loans are designed for borrowers who fall outside the conventional income or credit parameters used by QM loans, such as Fannie Mae, Freddie Mac, FHA, VA, and most Jumbo loans.
Elements of Non-QM loans that make them enticing include:
- Alternative Income Verification: Many Non-QM loans don’t require standard income documentation, such as tax returns or pay stubs, which is helpful for self-employed borrowers or those with unique income sources.
- Flexible Credit Score Requirements: Non-QM lenders often work with borrowers who have low credit scores, recent bankruptcies, or other credit history challenges.
- Debt-to-Income (DTI) Ratio Flexibility: Non-QM loans may allow higher DTI ratios than conventional mortgages, making them a viable option for borrowers with ongoing debt obligations.
Instead of relying on standard income documentation like W-2s or tax returns, Non-QM lenders accept alternative forms of income verification.
These include:
- Debt Service Coverage Loans for rental income – by which borrowers can qualify using rental income only.
- Asset Depletion Loans – by which borrowers can qualify solely based on the value of their assets.
- No Ratio Loans, which do not require any income verification at all.
- Bank Statement Loans, which allow borrowers to qualify solely off of the average deposits going into their bank accounts.
In any case, it is the flexibility of Non-QM loans that makes them an ideal solution for borrowers recovering from bankruptcy who may face difficulties meeting traditional income verification and credit requirements.
Why Non-QM Loans Are Ideal for Borrowers with Bankruptcies
Most traditional mortgage options require substantial waiting periods after a bankruptcy is discharged, making Non-QM loans a practical alternative. Here’s how Non-QM loans can make homeownership or refinancing accessible sooner:
- No Waiting Period After Bankruptcy Discharge: Unlike traditional mortgages, which enforce long waiting times, Non-QM loans allow immediate access to financing after a bankruptcy discharge. However, borrowers may need a down payment (for a purchase) or equity (for a refinance) of around 30% to qualify.
- Flexible Credit Requirements: Non-QM lenders often work with borrowers with lower credit scores or recent credit issues, making Non-QM loans ideal for those emerging from financial hardship.
- Alternative Loan Options: Non-QM loans, such as Asset Depletion Loans (based on assets rather than income) or Debt Service Coverage Loans (based on rental income), provide flexibility in how income is verified, especially for self-employed or retired borrowers.
- Potential to Exit Bankruptcy: For borrowers in Chapter 13 bankruptcies, Non-QM loans can be used strategically to pay off remaining debts and the bankruptcy itself, fostering a much faster path to financial recovery.
How to Use a Non-QM Loan to Exit Bankruptcy
If you’re currently in Chapter 13 bankruptcy, using a Non-QM loan to pay off your bankruptcy can simplify your finances, reduce stress, and pave a faster path to financial stability. With a Non-QM cash-out refinance, you can clear outstanding obligations and even pay off your bankruptcy, as mentioned above. This will put you on the fast path to total financial recovery. This is how it works:
Sufficient Home Equity
Borrowers with substantial home equity can leverage a cash-out Non-QM loan to settle debts tied to their Chapter 13 bankruptcy. The equity acts as collateral, and the cash-out proceeds are used to pay off remaining debt and the bankruptcy itself. This strategy essentially clears the bankruptcy, allowing you to consolidate all outstanding obligations into a single mortgage loan. It also means you’re moving from multiple payments to one streamlined monthly payment, simplifying your overall financial management.
Meet Payment Requirements
To qualify for a Non-QM loan while still in an active Chapter 13 bankruptcy, borrowers generally need to demonstrate 12 months of on-time payments to the bankruptcy trustee. This payment history shows that you’ve met the terms of your repayment plan, building lender confidence in your financial commitment.
Approval from the Trustee or Bankruptcy Judge
Exiting Chapter 13 bankruptcy using a Non-QM loan requires written approval from the bankruptcy trustee or judge. This approval indicates that the court agrees with using the new mortgage loan to settle outstanding debts. The trustee or judge evaluates your financial position to ensure this new loan will effectively resolve all existing obligations, accelerating your financial recovery.
Equity of 20% or More
The best Non-QM lenders require equity of 20% or more at close to offset the increased risk associated with borrowers in bankruptcy. This level of equity demonstrates financial stability, giving lenders assurance that they have a substantial security interest in the property. For borrowers refinancing with this equity, the value in your property becomes an asset that can support your financial recovery and help you exit bankruptcy faster.
Using a Non-QM loan to exit Chapter 13 bankruptcy can be a strategic way to improve your credit profile, reduce your debt-to-income ratio, and gain financial flexibility.
Down Payment of 20% or More
Borrowers in Chapter 13 who do not yet own a home, can also use Non-QM mortgage financing to achieve their goal of homeownership. The requirements for purchase money financing are the same as those for refinancing that are set out above.
Understanding Bankruptcy Types and Mortgage Options
Understanding the type of bankruptcy filed is essential when exploring mortgage options. The two most common types of personal bankruptcy—Chapter 7 and Chapter 13—affect mortgage eligibility differently.
- Chapter 7 Bankruptcy (Liquidation): This process involves selling off non-exempt assets to pay creditors or simply discharging debts if there are insufficient assets to sell. Chapter 7 is typically used by individuals who don’t have a steady income or are overwhelmed by unsecured debts like credit card bills. Once the assets are liquidated and debts are discharged, the borrower is released from most types of debt.
- Chapter 13 Bankruptcy (Reorganization): Known as a wage earner’s plan, Chapter 13 allows individuals with regular income to create a repayment plan for part or all of their debts over three to five years. This type of bankruptcy is common for those who want to keep their home or other assets but need help reorganizing their debt payments.
Mortgage Waiting Periods for Conventional Loans vs. Non-QM Loans
For those who prefer conventional loan options, the standard waiting periods after bankruptcy are as follows:
- Chapter 7 Bankruptcy: 4 years for conventional loans (Fannie Mae and Freddie Mac) and 2 years for FHA loans.
- Chapter 13 Bankruptcy: 2 years for conventional loans and 1 year for FHA loans from the date of discharge.
Non-QM Loans, on the other hand, require no waiting period after discharge, providing immediate financing options for eligible borrowers. The Non-QM loans that require no waiting periods do, however, require more equity (for a refinance) or down payments (for a purchase) of 30% or more.
Non-QM Loan Requirements for Chapter 13 Bankruptcy
As discussed above, borrowers currently in Chapter 13 bankruptcy may still qualify for a Non-QM loan with certain conditions:
- 12 Months of On-Time Payments to the trustee (arrears may be allowed in some cases)
- Letter of Explanation detailing the bankruptcy’s cause and confirming it was a one-time event
- Approval from Trustee or Judge to apply for new financing
- Documentable Income to repay the loan in most cases
By meeting these requirements, borrowers in Chapter 13 bankruptcy can access Non-QM financing to consolidate debts, potentially exit bankruptcy sooner, and move forward with a more manageable financial structure.
FAQs About Non-QM Loans and Bankruptcy
What’s the difference between a Non-QM Loan and a QM Loan?
QM loans are traditional mortgages, meeting CFPB standards and including common loans like FHA and Fannie Mae. Non-QM loans or Non-Qualified Mortgages are flexible with income verification and credit, ideal for borrowers with non-standard financial profiles.
How soon after bankruptcy can I get a mortgage with a Non-QM Loan?
What’s the minimum credit score needed for a Non-QM loan after bankruptcy?
Non-QM loans generally require a minimum credit score of 580, though some lenders may have even more flexible credit score requirements.
Do Non-QM loans have higher interest rates than conventional mortgages?
Yes, Non-QM loans often come with higher interest rates to offset the increased risk taken on by mortgage lenders. However, they provide more accessibility to those with recent bankruptcies or credit challenges.
Can I use rental income to qualify for a Non-QM loan?
Yes, Non-QM loans offer Debt Service Coverage Loans, which rely solely on rental income as an alternative to standard income verification. This is beneficial for borrowers who may not have traditional employment or regular W-2 income.
How does my debt-to-income (DTI) ratio affect my ability to get a Non-QM loan?
Non-QM lenders are typically more lenient with DTI ratios, which means they can consider higher ratios than conventional loans, giving borrowers with existing debts more flexibility in obtaining financing.
How much equity do I need to get a Non-QM loan?
Borrowers in or just out of a Chapter 13 Bankruptcy will need as little as 20% equity or a 20% down payment to obtain a Non-QM loan, depending on whether they are purchasing or refinancing. Borrowers just out of Chapter 7 will need 30% or more.
Why JVM Lending is the Right Choice For Your Non-QM Loan
At JVM Lending, we specialize in helping borrowers with complex financial histories, including those recovering from bankruptcy. Our team understands that every financial situation is unique, and we take the time to assess your specific needs, whether you’re considering an FHA loan, a Non-QM loan, or other loan options. We’ll guide you through your choices, helping you understand your credit report, debt-to-income ratio, alternative income verification options, waiting periods, bankruptcy court interactions, and all relevant factors.
Our experts will work with you to evaluate your options, rebuild your credit, and help you find the best mortgage loan to achieve your goals, whether they involve refinancing or pursuing homeownership.
Contact Us Today to Explore Your Mortgage Options After Bankruptcy
If you’re considering buying a home after bankruptcy or need guidance on using a Non-QM loan to exit a Chapter 13 bankruptcy, contact JVM Lending today or get started by filling out our loan application.
Our experienced team is here to help you find the mortgage solution that fits your needs, regardless of your credit history or financial situation.
