Non-QM Documentation Tiers: Matching the Right Program to the Right Borrower

Non-QM lenders offer multiple documentation tiers that allow borrowers to qualify without traditional W-2 and tax return income verification. Each tier has distinct eligibility requirements, qualifying income calculation methods, and risk overlays. Matching the borrower to the right tier upfront prevents file turndowns after processing.

Bank Statement Programs

Bank statement programs use 12 or 24 months of bank statements to calculate qualifying income. Business owners typically use business statements with an expense factor (typically 50% for service businesses, 25% for wholesale/retail), while self-employed borrowers with transparent personal accounts may use personal statements with no expense factor. Lenders require that the account is active throughout the statement period.

1099-Only Programs

• ✦Uses 12 or 24 months of 1099s without requiring the full tax return
• ✦Qualifying income is typically based on 90% of 1099 income after a 10% expense allowance, though lender policies vary
• ✦Best suited for independent contractors with consistent annual 1099 income and no complex deductions
• ✦Lenders usually require the 1099 issuer to be a single employer to avoid treating the income as W-2 equivalent

Asset Depletion Income

Asset depletion divides eligible liquid assets by a factor (commonly 60 to 84 months depending on the lender) to generate a monthly qualifying income figure. Eligible assets typically include checking, savings, money market, and vested retirement accounts -- with a haircut of 30 to 40% on retirement accounts. This works well for high-net-worth retirees who hold substantial assets but show limited or no earned income.

Profit and Loss Statement Programs

Some non-QM lenders accept a CPA-prepared profit and loss statement for the most recent 12 months as the sole income documentation. The CPA must be a licensed CPA or enrolled agent, the P&L must be current (within 60 days of application), and the lender will typically require 12 months of business bank statements to support it. This tier generally carries higher rate premiums than the bank statement tier.

DSCR (Debt Service Coverage Ratio)

DSCR underwriting qualifies the property rather than the borrower. The ratio is monthly gross rental income divided by total monthly PITIA (principal, interest, taxes, insurance, and association dues). Most lenders require a minimum ratio of 1.0 (breakeven) with better pricing at 1.25 and above. No personal income documentation is required, making DSCR the cleanest program for investors with complex returns.