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What To Look For In Non-Prime Mortgage Lenders

Written by Banks Editorial Team

Updated December 18, 2023​

4 min. read​

If you’re looking for mortgage options, you’ve probably come across non-prime loans. These are mortgage products that have recently made a comeback after the 2008 housing crisis. Before the Great Recession, anyone could easily get a mortgage by just stating their income without any verification. As a result, many borrowers defaulted on their loans, resulting in the housing market crash.

After such a catastrophe, the government placed strict standards to prevent another occurrence. This was when lenders created non-prime mortgages for borrowers who did not meet the requirements for a qualified mortgage.

Keep reading to learn how non-prime mortgage works, who it is best for, and how to choose the best non-prime mortgage lender.

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What is a Non-Prime Mortgage?

A non-prime mortgage is a loan program that does not fall in the same category standards as loans regulated by the federal government. They are typically made for borrowers who have had past negative credit events, which led to bankruptcy, foreclosure, short sale, or charge-offs.

Non-prime loans have made it easy for borrowers who have had any of these circumstances to seek a mortgage with alternative documentation rather than supplying tax returns, W-2s, or pay stubs.

This type of mortgage has trade-offs, though. For example, lenders typically charge higher interest rates and fees to offset the lending risks associated with non-prime loans. For this reason, borrowers should view non-prime loans as a temporary solution to an immediate need.

Are They Different from Sub-Prime Mortgages?

You can think of non-prime mortgages as the “newly improved” version of subprime loans that were issued a decade ago before the global housing market meltdown. Back then, you could easily qualify for a loan without proving your income.

Today, non-prime loans have strict measures that require lenders to evaluate borrowers’ eligibility to repay the loan. This means you may not qualify for a mortgage if you do not meet specific requirements, unlike subprime mortgages. That’s why they are sometimes referred to as non-qualified mortgages.

How Does a Non-Prime Mortgage Work?

Non-prime mortgages work like conventional loans. The only difference is that it has lenient requirements, and people with low credit scores can qualify.

When you apply for a non-prime loan, lenders will evaluate your eligibility for the loan. Some of the things non-prime lenders look at are your credit score and debt-to-income (DTI) ratio. They may also require alternative income documentation to verify your income.

And if you qualify, you’ll receive a set amount of money to buy a home or refinance. You’ll also agree to repay the loan with interest over a given period of time.

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Are Non-Prime Mortgages Right for You?

The question of whether non-prime loans are right for you entirely depends on your personal situation. Essentially, this type of mortgage is ideal for people with poor credit scores, homebuyers with recent bankruptcies, foreclosures, or charge-offs.

In addition, if you’re self-employed and having difficulties proving your income, non-prime mortgages may be right for you as you can use alternative income documentation. Foreign nationals with little to no U.S. credit history may also benefit from this mortgage type.

Who Are Non-Prime Mortgages Best For?

Borrowers use non-prime financing for various reasons. Not all are because of low credit scores. Some people may have difficulty proving their income, and non-prime loans become their last resort.

A non-prime mortgage is suitable for:

Self-Employed Individuals

If you’re self-employed, you probably know how difficult it can be to prove your income to get a loan. This is where non-qualified mortgages come in handy. Some non-QM loans have been created specifically for self-employed applicants.

Non-prime lenders will view you as “self-employed” if you’re not a W-2 employee or have 25% or more ownership interest in a business. In some cases, you may qualify for a self-employed mortgage if you have been in the same line of work you used to as an employee for a year.

People with Bad Credit

Credit-challenged individuals can now get a mortgage but not the kind of loans that existed a decade ago. Back in the day, borrowers could get a mortgage without verifying their income, with no down payment, and with bad credit.

Today, lenders must determine your ability to repay a loan. Even with that, you can get a non-prime mortgage without having to put down a lot of money or even with low credit scores like 500. Depending on the lender and the type of non-QM mortgage you need, you may be required to provide other documentation to verify your income.

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Homeowners with Property Issues

At times, the problem is not the borrower but the property. QM lenders typically have strict ground rules on the type of properties they’ll finance. Some lenders may not finance up to a certain percentage of condominium units that tenants can occupy.

Homeowners with properties like log homes, dome homes, rammed-earth houses, or even “regular” houses with weird floor plans may also have to seek special loans. Fortunately, non-prime mortgages might be a perfect financing solution for such borrowers.

How to Choose Non-Prime Mortgage Lenders

There are several non-prime loan lenders, but choosing the right one can be intimidating. Here’s what to consider to ensure you find the best non-prime lender.

Speed and Ease of Application

When choosing a lender, the ease of application and how long it takes to get the funding matter a lot. While most mortgage lenders today offer seamless online applications, not all fund the mortgage loan fast. Consider a lender with faster approvals.

Loan Term and Rates

When you take out a loan, you’ll usually repay the borrowed amount plus a fixed interest rate over a given period of time. Although loan terms and rates vary by mortgage lenders, the one with lower interest rates and favorable loan terms might be a perfect option.

Alternative Requirements

Non-prime mortgage lenders evaluate borrowers’ eligibility by looking at their credit score, down payment size, and proof of income. It might be difficult for non-qualified borrowers to meet all these requirements. Lenders that accept alternative documentation like bank statements, profit and loss statements, or 1099 forms are worth considering.

Variety of Loan Offers

There are several types of non-prime loans. Not all lenders, though, offer a wide variety of these mortgage products. A lender with a wide range of loan options is ideal since you won’t be limited to a few mortgage choices.

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Lender Reputation

How long has the lender been in business? The longer the years of experience, the more reputable a company is. When shopping for a mortgage lender, ensure that you check the time in business.

Customer Review Feedback

Reviews don’t lie. What previous customers say about the lender can give you an idea of whether it’s a good move to work with a particular lender. If most customers give positive reviews, they are probably satisfied with the service, and chances are you’ll like the service too.

Where to Get Non-Prime Mortgage Loans?

Non-prime mortgage loans are now more accessible than ever. However, not all lenders do offer this mortgage type. A full-service mortgage lender like Angel Oak Mortgage Solutions provides various non-qualified mortgages to borrowers of different kinds. Whether you’re a real estate investor, small business owner, or a gig worker

You can get the following non-prime loans through Angel Oak Mortgage Solutions:

To apply for a non-prime mortgage through Angel Oak Mortgage Solutions, submit a simple online application form to inquire about traditional and non-QM mortgage products.

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