Non-QM, short for non-qualified mortgage, refers to home loans that do not meet the strict criteria set by government-backed programs like Fannie Mae and Freddie Mac. Real estate investors often use this category when their income doesn’t fit conventional underwriting molds.
Most non-QM investment loans are underwritten on a single question: does the property’s rental income cover the mortgage payment? That framework is called DSCR, or debt service coverage ratio, and it works well when the answer is clearly yes. But it leaves out borrowers whose personal finances are strong even when the property-level numbers are thin.
A newer underwriting approach evaluates the borrower’s income and debt directly. According to Daniel Norris of American Heritage Lending, this approach is producing more aggressive terms than DSCR products can support, including 85% loan-to-value on purchases and 80% on cash-out refinances.
“We somewhat recently introduced a new investment product where rather than qualifying through the DSCR, we are actually looking at the borrower’s personal income and debt – kind of more akin to a traditional loan,” Norris says.
The product reflects a growing recognition within non-QM lending that DSCR is not the only underwriting framework capable of supporting investment property financing. Some deals, in Norris’s view, are better served by evaluating the borrower rather than the property.
DSCR underwriting hinges on that same ratio. When it is strong, the loan is straightforward to underwrite. When it is marginal, or when the property is in a rural area, recently acquired, or otherwise hard to value, the DSCR framework offers little additional information to offset the uncertainty.
The result, according to Norris, is that DSCR products tend to price conservatively on deals where the property-level data alone does not provide sufficient comfort. Lenders compensate with lower LTVs, higher rates, or both. Borrowers with stable income, manageable debt loads, and substantial assets may find themselves constrained by a framework that ignores those strengths.
“With that product, it is a more robust credit package,” Norris says. “We get a better idea of the borrower, who it is that we’re lending to.”
Norris says the fuller borrower picture also opens the door to rural properties, which are frequently excluded from DSCR programs because comparable rental data is thin and valuations are harder to support. A borrower-income approach sidesteps that limitation by grounding the credit decision in the borrower’s financial capacity.
Beyond LTV, Norris argues that the personal income underwriting approach creates a pricing advantage that DSCR products cannot structurally replicate. A lender can price the loan more aggressively when it knows more about a borrower’s ability to service debt. That means looking beyond whether the property cash flows, to whether the borrower has the income and balance sheet to absorb a vacancy or downturn.
“With a little bit more certainty, with a stronger credit package, we can then pass off those benefits to the consumer and be a little bit more aggressive and a bit more favorable,” Norris says.
As DSCR products have proliferated and competition among non-QM lenders has intensified, pricing differentiation has become harder to sustain on features alone. A borrower-income product that reduces lender risk, rather than offering looser guidelines at higher cost, creates a different basis for competition.
Norris is direct about the trade-offs that exist elsewhere in the market. Lenders who offer more aggressive leverage without additional underwriting rigor tend to compensate through higher rates or upfront fees. “You’re going to always have a give and take, no matter where you go,” he says.
For brokers, the practical implication is that deals previously declined or priced out of reach on DSCR terms may now be financeable under a personal income framework. This applies especially to borrowers who are financially strong but whose target properties do not generate the cash flow ratios that DSCR programs require.
Rural properties, discussed above, are one practical example. Investors seeking high-LTV cash-out refinances to fund additional acquisitions are another: personal income underwriting can support leverage that DSCR products cap at lower levels.
Norris points to a related feature, which the lender calls “stacking.” It lets borrowers roll broker points, discount points, and realtor fees into the loan amount, increasing effective leverage without giving up competitive pricing, according to Norris. “Despite the LTV, the loan value going up, we still get to price it at the lower range and give them the best of both worlds,” he says.
The personal income investment product adds to a wider lineup of investment lending options at American Heritage Lending. According to Norris, that lineup now includes DSCR, owner-occupied bank statement and 1099 programs, asset depletion, fix-and-flip, renovation loans, and ground-up construction, with the personal income product the latest addition.
Norris says the company lends on properties ranging from single-family residences to 10-unit buildings, including warrantable condos, non-warrantable condos, and condotels. He adds that for brokers whose borrowers don’t fit conventional guidelines, such as self-employment income understated on tax returns, foreign national status, or non-warrantable condo eligibility, the non-QM space offers options conventional lending cannot.
About the Expert: Daniel Norris leads a wholesale sales team at American Heritage Lending, a California-based non-QM lender.
This article is intended for informational purposes only and does not constitute legal, financial, or investment advice. The views and opinions expressed herein reflect those of the individuals quoted and do not represent an endorsement of any company, product, or service mentioned. Readers should conduct their own due diligence and consult qualified professionals before making any investment decisions.
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