By Jeff Lazerson | jlazerson@mortgagegrader.com | MortgageGrader.com | September 8, 2025
Article originally posted in Orange County Register on September 4, 2025
If you want the cheapest mortgage rate, you must meet certain underwriting standards from mortgage giants Fannie Mae or Freddie Mac.
For example, you must prove your stable income with W2s, tax returns and the like.
You must also show your total house payment plus certain monthly recurring debts don’t exceed a certain percentage of your gross income (before taxes).
Fannie and Freddie don’t make mortgages. Rather, they purchase closed loans from mortgage lenders. Because of the explicit U.S. government guarantee, they can offer the cheapest money.
If you don’t fit the F&F conventional box, there is an alternative, exotic loan avenue, the so-called non-QM or non-qualified mortgage channel that just might get you home.
Lenders in the exotic mortgage space consider alternative income documentation to tax returns and the like — or even no income. Larger down payments or more equity (than F & F) are standard in a refinance. These loans carry higher interest rates than the mortgage giants due to the increased risk of not knowing for certain what the income is (like tax returns).
I want to take you through some examples of how those who don’t fit in the conventional world can get funded in the exotic world.
One program with a surprisingly competitive interest rate of 6.375% is for a borrower who can’t or won’t document his or her income. The job section of the application is left blank. The income is left blank. This program does require 30% down/equity with a minimum 700 middle FICO score. I affectionately call this fog-the-mirror mortgage. You can also get this program with just 20% down but at a 9% rate.
Examples would be someone who just lost his job but has plenty of cash reserves until he or she gets back on their feet. Another would be someone going through a divorce and receiving spousal support but doesn’t yet have a final divorce decree or a court signed separation agreement with X amount of alimony income. A third example would be someone who can’t document enough income for the likes of Fan and Fred.
Another exotic loan program is the profit and loss qualifying income statement for self-employed borrowers. You can create your own profit and loss statement without your tax preparer attesting to the income if you are putting at least 30% down. With a tax preparer, you can get in with as little as 15% down.
One example is that someone who does his or her own tax returns would need the 30% down. Another example is someone who shows a strong year-to-date income but has previous year’s tax returns with lower income, thereby not qualified for a Fannie Mae mortgage.
As an aside, a self-created profit and loss statement is probably not worth the paper it is written on. With 30% down, it must be worth the risk for a lender, or the lender wouldn’t be doing it.
By far, the most popular exotic program is called DSCR or debt service coverage ratio loan program. This program is for the purchase or refinance of an investment property. For the most part, if the market rent is at least $1 more than the total house payment, you are good to go. For example, say the principal, interest, taxes and insurance is $4,000. The market rent for that property is $4,001. You pass.
There are even DSCR loans in which no ratio of rents-to-house payment are counted, but it typically requires 30% or more down.
The DSCR loan will allow as little as 15% down.
This program is especially good for someone who takes large tax deductions on rental properties. Therefore, he can’t show enough income for a full-doc Fannie Mae mortgage.
Twelve or 24 months of your most recent business or personal bank statements can act as an alternative income source for self-employed borrowers.
For example, the lender adds up the total deposits only (money transfers do not count) over your previous 12 months of business bank statements. The lender makes you take a haircut to cover the overhead.
Say you are an architect working from home who is likely to have little overhead. The lender would take 20% off the income to cover the overhead. If you had $400,000 of total deposits in the previous 12 months minus 20% would get you to $320,000 annually or $26,666 monthly.
If you had a high overhead business like a restaurant, the haircut would be much greater — like 50% or 60%.
Conventional lending never allows you to compute income via bank statements.
Exotic mortgages aren’t just about income. There are other ways to utilize them.
For example, let’s say you have a condo complex that is not Fannie Mae warrantable, but you can fully document your income via tax returns. You may be able to get that loan funded whereas Fannie wouldn’t touch it.
Today’s exotic mortgages are unlike those of the mortgage meltdown days. Those loans came with prepayment penalties, balloon payments and even zero down payments for folks with poor credit. Risky business for sure.
From last week’s owner-occupancy fraud column: One mortgage executive explained to me that the simplest way to detect occupancy fraud is the homeowner’s insurance policy.
If you have an owner-occupied policy, the policy is not going to be valid if you make a claim on rental property and visa-versa.
So, owners tend to switch the policy after loan funding if it’s going to be a rental property. They do it for the compliant/valid coverage. And a landlord’s policy is cheaper than an owner-occupied policy. It’s not hard at all for lenders to check this post-funding in order to determine occupancy fraud, should they want to check up.
Freddie Mac rate update: The 30-year fixed rate averaged 6.5%, 6 basis points lower than last week. The 15-year fixed rate averaged 5.6%, 9 basis points lower than last week.
The Mortgage Bankers Association reported a 1.2% mortgage application decrease compared with one week ago.
Bottom line: Assuming a borrower gets the average 30-year fixed rate on a conforming $806,500 loan, last year’s payment was $80 less than this week’s payment of $5,098.
What I see: Locally, well-qualified borrowers can get the following fixed-rate mortgages with one point: A 30-year FHA at 5.375%, a 15-year conventional at 5.125%, a 30-year conventional at 5.99%, a 15-year high-balance conventional at 5.5% ($806,501 to $1,209,750 in LA and OC and $806,501 to $1,077,550 in San Diego), a 30-year high-balance conventional at 6.375% and a jumbo 30-year-fixed at 6.125%.
Eye-catcher loan program of the week: A 30-year mortgage, fixed for the first five years at 5.5%, with 30% down payment and 1 point cost.
Jeff Lazerson, president of Mortgage Grader, can be reached at 949-322-8640 or jlazerson@mortgagegrader.com. His website is www.mortgagegrader.com.
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