Common Mistakes That Can Disqualify You From a Non-QM Mortgage

If you're self-employed, an investor, or have an unconventional financial background, a non-qualified mortgage (Non-QM) can be the perfect solution for homeownership. Unlike conventional loans, which rely on rigid tax returns and strict debt-to-income ratios, Non-QM loans offer flexible alternatives to qualify. 

However, even with these relaxed guidelines, it’s easy to make mistakes that can lead to a denial. Understanding the common pitfalls is the first step toward a smooth approval process. Ready to get started? Get Pre-Qualified with Prysma today.

What Are Non-QM Loan Requirements?

Non-QM loan requirements are program-specific rules covering income documentation, credit, assets, reserves, LTV/DTI, and property type. These requirements are less rigid than those for conventional loans, which are backed by Fannie Mae and Freddie Mac and are designed for borrowers with traditional W-2 income and low debt. The specific requirements for a Non-QM loan depend on the product you choose, such as a Bank-Statement loan, a DSCR loan, an Asset-Depletion mortgage, or an Interest-Only loan. Each product has unique underwriting standards tailored to a specific borrower profile.

Top Reasons Non-QM Loans Get Denied

Navigating the world of Non-QM underwriting can feel complex, but most denials stem from a handful of common issues. Here are the top mistakes borrowers make and how to avoid them.

1. Submitting Mixed Personal and Business Deposits Without Clear Separation

Mixing personal and business funds in the same account is a surefire way to complicate your application. Underwriters need to clearly distinguish your personal income from your business revenue to accurately calculate your qualifying income.

1. The Fix: Maintain separate bank accounts for your business and personal finances. Before you apply, provide 12 to 24 months of consistent bank statements for both accounts and be prepared to submit a letter from your accountant confirming the split.

2. Unseasoned or Unexplained Large Deposits

A large, sudden deposit that isn't from a verifiable source, like your regular paycheck or a documented asset sale, will raise a red flag. These "unseasoned" funds look suspicious to underwriters and can't be counted as part of your qualifying assets.

1. The Fix: Any significant deposit should have a clear paper trail. Seasoning refers to the time a deposit sits in your account, typically 60 to 90 days, without being touched. If you receive a gift for your down payment, get a proper gift letter from the donor to document the source.

3. Insufficient Months of Bank Statements

Many bank-statement loans require a full 12 or 24 months of consecutive statements to calculate an average monthly income. If you only provide six or eight months of statements, the lender can’t complete the required income analysis.

1. The Fix: Before you start your application, gather the full history of your bank statements. If you’re just starting a new business, it may be better to wait until you have the required 12 or 24 months of history to ensure you meet all the bank statement loan requirements.

4. Too Few Reserves (Months of PITIA)

Lenders want to see that you have enough cash reserves to cover your mortgage payments (principal, interest, taxes, insurance, and HOA dues, or PITIA) for a period after closing. Non-QM loans often require several months of reserves.

1. The Fix: Bolster your liquid savings before applying. Liquid assets, like checking and savings accounts, retirement funds, and stocks, are often considered reserves. Aim for a few extra months of reserves beyond the program minimum to give your application an edge.

5. DSCR Below Program Minimum

For investors using a Debt Service Coverage Ratio (DSCR) loan, this is a common reason for denial. A DSCR loan allows you to qualify based on the property's rental income rather than your personal income. If the rental income divided by the monthly mortgage payment is too low, you won’t qualify.

1. The Fix: Before applying, analyze your potential rental income. You might need to increase the rent, make a larger down payment, choose a different property with a higher rental yield, or consider a rate buy-down to lower the monthly payment.

6. Over-Max LTV/CLTV for Product

Loan-to-Value (LTV) and Combined Loan-to-Value (CLTV) ratios are critical. If the amount you want to borrow exceeds the maximum LTV allowed for a specific Non-QM product, your application will be denied.

1. The Fix: Make a larger down payment to lower your LTV. Alternatively, discuss different programs with your loan officer to see if there's a different Non-QM option that allows for a higher LTV.

7. Undisclosed Liabilities or Recent Credit Events

Hiding debts or a recent bankruptcy, foreclosure, or short sale is a quick way to get your application rejected. Underwriters will uncover these during their review.

1. The Fix: Be transparent with your loan officer from the start. Provide a full list of all your debts and be prepared to write a letter of explanation for any credit events. Some programs have seasoning periods, meaning you need to wait a specific amount of time after an event before you can qualify.

8. Inconsistent Income Documentation

When a lender reviews your bank statements, they need to see that the income you claim matches the deposits. For example, if you say you earn $10,000 per month but your deposits only show $5,000, that inconsistency is a problem.

1. The Fix: Ensure your documentation is consistent. If you are self-employed and receive cash payments, you will need to deposit them into a traceable bank account. A CPA letter or a profit and loss statement can also help bridge any gaps.

9. Occupancy or Property-Type Mismatch

Non-QM loans have specific rules about what types of properties they can finance. Condotels, non-warrantable condos, and short-term rentals can be ineligible for some programs.

1. The Fix: Confirm with your loan officer that the property you want to purchase is eligible for the loan program you're applying for.

10. Inaccurate Application Data

Submitting an application with simple errors, like a typo in your name, an incorrect address, or missing pages, can cause unnecessary delays and even lead to a denial.

1. The Fix: Double-check every single page of your application and documentation. Use a simple checklist to ensure you've provided everything accurately and completely.

11. Using Cash/Zelle Without a Verifiable Source

Cash deposits and third-party payment apps like Zelle can be hard to track and verify. Lenders need to know the source of your funds to ensure they aren't from an illicit source.

1. The Fix: Whenever possible, use traceable ACH transfers or wire transfers for large deposits. If you have a cash-based business, consult with your loan officer on how to properly document this income.

12. Not Meeting Product-Specific Rules

Each Non-QM loan has unique rules. For instance, an Interest-Only loan has different payment calculations, and an Asset-Depletion mortgage requires a specific mathematical formula to determine income.

1. The Fix: Work closely with a knowledgeable loan officer who can walk you through the specific guidelines of your chosen program and help you prepare all the necessary documentation.

Document Checklist to Avoid Denial

Having your documents organized and ready to go is crucial for a smooth application process. Here’s a basic checklist to get you started:

1. Identity & Residency: Driver’s license or other government-issued ID, proof of address.
2. Bank Statements: 12 to 24 months of complete, consecutive PDF statements (all pages, including blank ones).
3. Income Documentation: Profit & Loss statement or CPA letter (when applicable).
4. Assets & Reserves: Statements for all checking, savings, retirement, and investment accounts.
5. Property-Related Docs: Existing mortgage statements, lease/rent roll for investment properties.
6. Letters of Explanation (LOX): A written explanation for any credit events, large deposits, or other anomalies.
7. Gift Letters: For any funds gifted for the down payment or closing costs.

For a more detailed list, download our free Non-QM Mortgage Checklist to ensure you have everything you need.

State-by-State Notes (CT • FL • MA • NY)

Prysma is a leading Non-QM lender, and our loan officers are well-versed in the local markets of Connecticut, Florida, Massachusetts, and New York.

1. Connecticut: Non-QM loans are popular in CT for self-employed professionals, particularly in the Stamford, Greenwich, and Hartford areas. Our specialists in Connecticut can help you navigate local real estate and mortgage trends.
2. Florida: The Florida market attracts many investors and retirees. DSCR loans are highly sought after for properties in Miami, Orlando, and Tampa. Whether you’re looking for a vacation rental or a long-term investment property, we can help.
3. Massachusetts: The high home prices and competitive market in MA require creative financing solutions. Non-QM loans are a great option for business owners in Boston and tech professionals in the greater Boston area.
4. New York: From entrepreneurs in NYC to property investors in upstate NY, Non-QM loans provide the flexibility needed in this diverse state. Talk to a Non-QM specialist in New York to find the perfect loan program for your needs.

How Prysma Helps You Qualify

At Prysma, we specialize in providing tailored Non-QM solutions. We don't just process applications; we partner with you to ensure a successful outcome. Our approach includes:

1. Pre-Underwrite File Review: We conduct a thorough pre-underwriting review of your application to spot any potential issues before you formally apply.
2. Gap Analysis & Fix Plan: We identify any missing documents or gaps in your financial profile and provide a clear plan to address them, whether it's building up reserves or correcting documentation.
3. Product Fit Analysis: We help you choose the right product, whether it’s a bank statement loan, DSCR loan, or another option, to ensure it aligns with your financial situation and goals.
4. Clear Communication: We keep you informed throughout the process, from application to closing, so you always know what to expect.

Ready to take the next step with Prysma today?

Navigating non qm loan requirements can be complex, but with the right guidance, it doesn’t have to be. By understanding the common mistakes and how to fix them, you can significantly improve your chances of getting approved.

Prysma has established itself as a recognized leader in ITIN/Tax ID Loans, serving non-US citizen families across Connecticut, Florida, Massachusetts, New Jersey, New York, Pennsylvania, and Texas. Our experienced loan professionals personally meet with each client to identify optimal rates and financing options for your specific situation.

Don't let uncertainty about current mortgage rates delay your homeownership dreams. Contact Prysma today to schedule a personalized consultation and take your first step toward owning a home with a lender who truly understands your community and goals. 

Get Pre-Qualified | Talk to a Specialist

FAQs

1. What are the minimum Non-QM loan requirements?

Lenders assess several key factors, including your income documentation (like bank statements), credit history, available assets and reserves, and the loan-to-value (LTV) ratio. For investors, the Debt Service Coverage Ratio (DSCR) and the property's eligibility are also crucial.

1. How many months of bank statements do I need?

Most bank-statement loan programs require 12 to 24 months of consecutive personal or business bank statements. Underwriters use this history to calculate your qualifying income.

1. What DSCR is required for investors?

The minimum DSCR varies by lender and program, but a positive ratio at or above program guidelines is typically required. A higher DSCR can improve your interest rate and loan terms.

1. How much in reserves should I show?

Lenders usually require reserves equal to 3 to 12 months of your mortgage payments (including principal, interest, taxes, and insurance). The specific amount often depends on the loan program and your credit profile.

1. Do recent credit events automatically disqualify me?

No, not necessarily. Unlike strict conventional loans, many Non-QM programs are more flexible. They often allow you to qualify after a specific seasoning period following events like a bankruptcy or foreclosure.

1. Are Non-QM loans available in CT, FL, MA, and NY?

Yes, Non-QM loans are available in all four states. Prysma has specialists who are experts in these local markets and can help you find the right loan for your needs.

1. Can I qualify for a loan without tax returns?

Yes, that is the primary feature of a bank-statement loan. Instead of using your tax returns, we analyze your personal or business bank statements to determine your qualifying income.