Chapter 34 — Key Takeaways
The one sentence
Non-QM is not "no-doc." It is a loan outside the Qualified Mortgage safe harbour, and the Ability-to-Repay requirement applies in full. The documentation is different; the obligation is identical.
The core claims
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Non-QM is a legal classification, not a documentation level. A fully documented loan to a 780 borrower is non-QM if the note carries an interest-only feature, the term exceeds thirty years, points and fees exceed the threshold, or the ratio or pricing profile falls outside the QM parameters. Documentation type and QM status are independent variables.
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What the lender gives up is the presumption, not the obligation. A QM that is not higher-priced carries a safe harbor; a higher-priced QM carries a rebuttable presumption; a non-QM loan carries neither and must defend its underwriting on the facts.
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A consumer mortgage advertised as requiring no income verification describes something that does not lawfully exist. Regulation Z requires verified information from reasonably reliable third-party records. Bank statements, brokerage statements, 1099s, and leases are third-party records — which is exactly why those programs are lawful and stated income was not.
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The one genuine exemption is business purpose. Regulation Z governs consumer credit. A business-purpose investor loan is outside it entirely — which is the legal footing DSCR lending stands on. The classification depends on the loan's actual purpose, not on the vesting.
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In a bank statement loan, the expense factor is the whole loan. Deposits are gross receipts; the factor converts them to income; the factor is an investor's assumption rather than a measurement. There is no standard expense factor.
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In asset depletion, the divisor is the product. The same assets produce three different incomes under a 120-, 240-, or 360-month divisor. The divisor is a program parameter, not a math fact, and at short divisors the credited "income" exhausts the assets long before the loan is paid.
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DSCR measures coverage, not profitability. It uses gross rent over PITIA and contains no vacancy, management, maintenance, or capital cost. A property can pass at 1.05 and require the owner to fund it every month.
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Prepayment penalties live in business-purpose lending, not in consumer non-QM. Regulation Z permits a penalty only on a fixed-rate qualified mortgage that is not higher-priced, subject to limits — so a consumer non-QM loan generally cannot carry one. State law adds restrictions and varies.
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Non-QM prices above agency because the investor base is thin. That premium is honest when the agency file was attempted and failed. It is an overcharge when it was not attempted.
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Non-QM is an equity product, not a rescue for a thin down payment. Lower maximum LTVs, no mortgage insurance, heavier reserves. The borrower short on cash is exactly the borrower non-QM cannot help.
The rule to memorize
Attempt the agency file first. Document why it failed. Only then price non-QM.
Three parts, all three required: run the Chapter 32 cash flow analysis and the findings; write one dated paragraph saying what the income was, what the ratio was, and what the findings returned; then price non-QM and put the cost comparison in the file.
The diagnostic: look at your last twenty self-employed borrowers. If none of them closed agency, you are not serving a niche — you are skipping a step.
The formulas
| Quantity | Formula |
|---|---|
| Bank statement income | (total deposits − exclusions) ÷ months × (1 − expense factor) × ownership % |
| 1099-only income | total 1099 gross ÷ months × (1 − expense factor) |
| Asset depletion income | (eligible assets after haircuts − funds consumed by the transaction) ÷ divisor |
| DSCR | gross rental income ÷ PITIA |
| Interest-only payment | balance × rate ÷ 12 |
| Cost of leaving agency | (non-QM P&I − agency P&I) × months, plus the difference in lender charges |
The numbers from this chapter
| Figure | |
|---|---|
| Worked bank statement file: qualifying deposits ÷ 12 | \$24,279.17/month |
| At a 50% expense factor | \$12,139.58/month |
| At a 68% factor — same borrower, same statements | \$7,769.33/month |
| Asset depletion, \$1,317,000 net, at 120 / 240 / 360 months | \$10,975.00 / \$5,487.50 / \$3,658.33 | |
| DSCR file: \$2,350 rent ÷ \$2,237.72 PITIA | 1.05 — and −\$554.18/month of real cash flow |
| Same file, interest-only qualification | 1.12 — and 0.95 after recast at today's rent |
| Prepayment penalty at month 12: 3% of UPB vs. six months' interest | \$6,922.27 vs. \$9,806.55 |
| Cost of leaving agency, 6.625% → 9.250%, per \$100,000 borrowed** | **\$182.37/month | |
| Same, over 60 payments, per \$100,000 | **\$10,942.20** |
All program parameters, rates, factors, and divisors above are constructed teaching values. Non-QM guidelines and pricing are investor-specific and are not published.
Key terms
non-QM · bank statement loan · expense factor · asset depletion / asset utilization · DSCR loan · debt service coverage ratio · profit-and-loss-only · 1099-only · ITIN loan · foreign national · interest-only · prepayment penalty (non-QM) · investor loan · business-purpose loan
What you should be able to do Monday morning
Take a self-employed application, collect the tax returns before you quote anything, run the Chapter 32 cash flow analysis, and put a dated paragraph in the file recording the qualifying income and the ratio. If it works, tell the borrower they do not need the expensive program. If it does not, derive a bank statement income from twelve months of deposits — with your own exclusion column — quote the non-QM loan with the dollars-per-month difference written down next to it, name the exit and when it happens, and confirm in writing whether a prepayment penalty applies.