The vocabulary of non-traditional lending, defined.

The lender takes the borrower's 1099s for the required period, often adds year-to-date deposit evidence, and derives a monthly income, in many programs after subtracting an expense factor for the costs of earning it. It suits contractors, commissioned professionals and gig workers whose gross receipts are clean but whose returns are full of deductions. History requirements and the treatment of multiple payers vary by lender.

Longer read: Alternative income documentation compared.

A shorter window reflects the business's current run-rate and favors an owner whose income has grown recently; a longer window smooths seasonal or lumpy deposits and is required by some programs or for some borrower profiles. Underwriters read the trend as well as the total, so a decline across the window can lower the figure or trigger a request for more history. Which windows a program offers, and at what pricing, varies by lender.

Longer read: 12-month vs 24-month bank statement loans.

The rule sits in the CFPB's Regulation Z and grew out of the Dodd-Frank Act's response to the loose underwriting of the mid-2000s. Lenders must consider factors such as current income or assets, employment, the new payment, other debts and credit history, and must verify them with reasonably reliable third-party records rather than a borrower's say-so. It covers closed-end consumer loans secured by a dwelling, which is why alternative-documentation programs still verify income, and why business-purpose loans on rental property and open-end lines such as HELOCs fall outside it.

Typical add-backs on a Schedule C are depreciation, depletion, amortization or casualty losses and the business-use-of-home deduction; the depreciation component of the standard mileage rate can also be added back. Fannie Mae's cash flow analysis form lays out the arithmetic many lenders follow, and it also subtracts items such as one-time income and the non-deductible share of meals. Running the add-backs is the first step before choosing an alternative-documentation program, because a return that qualifies after add-backs usually gets conventional pricing.

Longer read: Bank statement vs conventional for the self-employed.

The phrase describes a method, not a shortcut: the lender still has to verify what it relies on, and the file still goes through credit, appraisal and full underwriting. Each path has its own rules on how long the income history must be, what share of a business the borrower must own and which deposits or assets count, and those rules vary by lender. It is the accurate name for what search engines call 'stated income' or 'no doc' today.

Longer read: Alternative income documentation compared.

For a purchase, lenders use the lower of the contract price and the appraised value, so a low appraisal shrinks the loan rather than the price. Under appraiser-independence rules the lender orders the report through a management company or panel, and the borrower does not choose the appraiser. Rental property appraisals add a comparable rent schedule that DSCR lenders rely on, and some HELOC programs substitute an automated valuation or a desktop review for a full inspection. A borrower can ask the lender to reconsider the value with new comparable sales, and the outcome varies by lender.

The Single-Family Comparable Rent Schedule (Form 1007, Freddie Mac Form 1000) accompanies a standard appraisal and lists recently rented comparable properties, adjusts for differences and concludes a monthly market rent; the Small Residential Income Property Appraisal Report (Form 1025, Freddie Mac Form 72) builds the same analysis into the full appraisal of two- to four-unit property. Fannie Mae and Freddie Mac are replacing those numbered forms with a single dynamic Uniform Residential Appraisal Report under the Uniform Appraisal Dataset, and it carries the same comparable-rent analysis. DSCR lenders, who are not bound to agency forms, rely on whichever schedule the appraiser delivers to set the rent used in the ratio for a vacant or newly purchased property, and many use the lower of the schedule and any existing lease.

Longer read: How DSCR is calculated.

The lender totals eligible accounts, commonly checking, savings, brokerage and a discounted share of retirement funds, subtracts what is needed for closing and reserves, and divides the remainder by the program's divisor to produce a monthly amount. That amount can stand alone or supplement other income. It fits retirees and high-net-worth borrowers with modest taxable income, and the assets are verified with statements the same way any other qualifying source would be. Divisors, discounts and which accounts count vary by lender.

Longer read: Alternative income documentation compared.

The underwriter totals eligible deposits across the lookback window, removes items that are not business income such as transfers, loan proceeds and refunds, and, for business accounts, applies an expense factor to estimate what the business keeps. The result is divided by the number of months to produce a monthly qualifying income. Everything else about the loan is conventional in form: credit is pulled, the property is appraised and the borrower must show the business exists and who owns it. The bank statement income calculator walks through the arithmetic with your own deposits.

Longer read: Which deposits count on a bank statement loan.

The refinance step is where financing terms decide whether the strategy works: the lender's loan-to-value cap on the new appraised value sets how much capital comes back out, seasoning rules set how soon, and the property's rent against the new payment sets whether a DSCR program will do it at all. Investors who buy with cash or a short-term loan commonly use a DSCR cash-out refinance to complete the cycle. The strategy fails quietly when the appraisal comes in under projection or the rent does not cover the refinanced payment, so both numbers deserve conservative estimates before the purchase.

Longer read: DSCR cash-out refinance and seasoning.

Under the CFPB's Regulation Z, credit to buy, improve or maintain rental property the owner will not occupy is generally treated as business-purpose, so the Ability-to-Repay rule and the Loan Estimate and Closing Disclosure requirements do not apply. That exemption is why a DSCR loan can qualify on the property's rent instead of the borrower's personal income, and why the lender typically has the borrower sign a business-purpose affidavit and, when title is held by an entity rather than the individual, a personal guarantee. The classification is about the use of the money, not the borrower's job; using a business-purpose loan for a home you live in, or misstating the purpose to get one, is fraud.

Because the whole first mortgage is replaced, the new loan's terms apply to the entire balance, not just the cash taken out; that is the trade-off against a HELOC, which leaves the original loan in place. The amount available is set by the lender's loan-to-value cap on the appraised value, less the existing balance and closing costs, and cash-out pricing is generally less favorable than rate-and-term pricing on the same property. On investment property, a DSCR cash-out refinance is the common way to recycle equity into the next purchase, subject to seasoning and the program's cash-out rules.

Longer read: DSCR cash-out refinance and seasoning.

The CFPB's TRID rules require the borrower to receive it at least three business days before signing, and certain changes to the loan restart that period. DSCR business-purpose loans and HELOCs use different documents, so the form appears only on closed-end consumer mortgages. Before the appointment, read the cash-to-close figure, the prepayment-penalty box and the projected payments, and compare each against the Loan Estimate.

In a hypothetical example, a first mortgage of $300,000 plus a $100,000 line on a home valued at $500,000 is a CLTV of 80%. Lenders publish a maximum CLTV for a given program and credit profile, and the room between that cap and the existing balance is the ceiling for a new line or second loan. For a HELOC, many lenders compute the ratio on the full credit limit rather than the drawn balance, sometimes labeled HCLTV, because the borrower can draw the whole line at any time. The home equity calculator estimates available equity from your own figures.

It is the benchmark every program on this site is measured against. Conforming loans are sold to the agencies under published guidelines, the Federal Housing Finance Agency resets the loan limits each year, and a loan above the limit is a jumbo loan. For a self-employed borrower the conventional path reads tax returns with add-backs, which is why running it first is the standing advice before choosing a non-QM program.

Longer read: Bank statement vs conventional for the self-employed.

In a hypothetical example, $3,000 in monthly debt payments including the new PITIA against $10,000 of gross monthly income is a DTI of 30%. Lenders read a front-end ratio (housing payment alone) and a back-end ratio (all debts), and programs set maximums that vary by loan type and by the automated underwriting result. The income side is where documentation method matters: a self-employed borrower's DTI can look very different on tax-return income than on bank-statement income for the same business. DSCR loans generally do not use the borrower's DTI at all, measuring the property's rent against its payment instead.

The length of the draw period is set in the line agreement and varies by lender and program. During it the minimum payment usually covers only interest on the outstanding balance, so a borrower who pays the minimum reaches the end of the period owing the full amount drawn. Many agreements let the lender suspend further draws if the property's value falls or the borrower's credit changes materially, so the line is not an unconditional reserve. Paying principal voluntarily during the draw period reduces the payment jump that follows.

Longer read: HELOC draw period vs repayment period.

In a hypothetical example, monthly rent of $2,400 against a PITIA of $2,000 gives a ratio of 1.20, while rent of $1,800 against the same payment gives 0.90. DSCR programs use this ratio, along with credit and the property itself, as the primary qualifying measure instead of the borrower's personal income. Many lenders look for a ratio at or above break-even and price more favorably as it rises, while some accept a lower ratio at different terms; the ratio ignores vacancy, maintenance and management, so it overstates true cash flow. The DSCR calculator runs the arithmetic on your own numbers.

Longer read: How DSCR is calculated.

Investors vest in an entity for liability separation and portfolio management, and most DSCR programs accommodate it; most conventional programs do not, and require an individual borrower on the note and title at closing. The lender underwrites the entity's documents, typically the articles of organization, operating agreement, EIN letter and a certificate of good standing, and confirms who the members are. The entity is the borrower, but not the only party on the hook: its members sign a personal guarantee. Rules on entity type, member count and out-of-state entities vary by lender and state.

Longer read: DSCR loan in an LLC.

As a hypothetical example, suppose business deposits average $20,000 a month and the program applies a 50% expense factor; qualifying income is $10,000 a month. Many lenders set a default factor by industry or business type and allow a lower one when a CPA or licensed tax preparer signs a letter stating the business's actual expense ratio, or when a profit-and-loss supports it. Personal-account statements usually carry no expense factor because expenses were paid before the money reached the owner. One vocabulary trap: some lenders quote the factor as the share the business spends and others as the share it keeps, so ask which way a program states it before comparing quotes. The factor a program uses varies by lender and can move the qualifying figure more than any other single input.

Longer read: Bank statement loan expense factor, explained.

It is the opposite of alternative documentation. Full-doc files run through the agencies' automated underwriting, which is part of why they are cheaper and faster. For a self-employed borrower, full-doc income is the averaged return after add-backs, so heavy deductions or recent growth qualify for less than the business actually earns.

Longer read: Bank statement vs conventional for the self-employed.

A HELOC is open-end credit: interest generally accrues only on the drawn balance, the rate is usually variable and set from an index plus a margin, and when the draw period ends the balance is repaid on a schedule during the repayment period. It leaves an existing first mortgage untouched, which is the main reason to choose it over a cash-out refinance. The lender can reduce or freeze the line under conditions in the agreement, and the home is the collateral. The HELOC payment calculator models both phases from your own figures.

Longer read: HELOC vs cash-out refinance vs DSCR cash-out for investors.

Both are typically second liens sized with the same combined loan-to-value math, and both leave the first mortgage in place. The loan suits a single known expense where a predictable payment matters; the line suits staged spending, standby reserves or a down payment whose timing is uncertain, and it charges interest only on what is drawn. The line's flexibility carries interest-rate exposure and a payment step-up at the repayment period, while the loan's certainty means paying interest on the whole amount from day one. Availability of each for self-employed borrowers and on investment property varies by lender.

Longer read: HELOC vs cash-out refinance vs DSCR cash-out for investors.

HELOCs commonly use the prime rate as published in The Wall Street Journal as the index, while adjustable-rate mortgages have moved to indexes such as SOFR; the margin is set at closing and reflects the borrower's credit, the lien position and the program. When the index moves, the rate and payment move with it, subject to any periodic cap, lifetime cap and floor written into the agreement. Two lenders quoting the same index can produce very different costs through the margin, so the margin, caps and floor are the numbers to compare on a variable-rate product.

The trade is a lower payment now for a higher one later, when the balance amortizes over the remaining term. Some DSCR programs compute the coverage ratio on the interest-only payment and others on the amortizing one, which changes the ratio without changing the property. A loan with an interest-only period cannot be a Qualified Mortgage.

Longer read: How DSCR is calculated.

The form is required by the CFPB's TRID rules for closed-end consumer loans secured by real property and is designed so that offers from different lenders can be compared line by line. It is an estimate, not a commitment to lend or a locked rate; final figures appear on the Closing Disclosure before signing. Business-purpose loans such as DSCR financing are outside TRID and use different disclosures, and HELOCs receive their own early disclosures under Regulation Z rather than a Loan Estimate.

In a hypothetical example, a $400,000 loan on a home valued at $500,000 is an LTV of 80%, and the remaining 20% is the borrower's equity. Lenders set maximum LTVs by program, occupancy, property type and loan purpose, and cash-out refinances and investment property generally carry lower caps than an owner-occupied purchase. Because a higher LTV leaves the lender less cushion if the property must be sold, pricing usually worsens as the ratio rises, and conventional loans above a threshold require mortgage insurance. On a refinance the value comes from the new appraisal, which is why the appraisal result decides how much equity is actually usable.

For a leased property, many lenders use the lower of the two, and some will accept lease rent above market only within a tolerance or with proof the rent is being collected. For a vacant purchase there is no lease, so the appraisal's rent schedule governs. Short-term rental income is a separate question: where a program allows it at all, it is usually documented from platform history or a specialized analysis and treated conservatively. Assuming the lender will use your projected rent is one of the most common ways a DSCR file goes sideways.

Longer read: How DSCR is calculated.

Occupancy drives the loan's classification, pricing and documentation: a non-owner-occupied rental can be financed as business-purpose credit on its own income, while a home you will occupy is a consumer loan subject to the Ability-to-Repay rule. Lenders confirm occupancy through the application, the appraisal, leases and sometimes post-closing checks, and pricing on investment property is generally less favorable than on a primary residence to reflect the higher default risk. Claiming a rental as your residence to get better terms, or the reverse, is occupancy fraud.

Longer read: HELOC on an investment property.

Non-QM is a regulatory category, not a credit grade; it includes bank statement, 1099, profit-and-loss and asset-depletion loans to borrowers with strong credit whose tax returns understate income, along with interest-only and other structures. The industry also files DSCR loans under the label even though they are business-purpose credit and technically outside the consumer rules. A consumer-purpose non-QM loan still has to satisfy the Ability-to-Repay rule; the lender simply verifies repayment capacity from other records. Because these loans are held or sold outside the standardized agency market, pricing is generally less favorable than a comparable conventional loan.

Longer read: What is a non-QM loan?.

The P&L covers the period the program specifies and states revenue, expenses and net income; the lender uses the net figure, sometimes with add-backs, as qualifying income. Many programs test the statement against bank deposits and expect the two to line up within a tolerance, so a P&L that overstates revenue relative to the account behind it will be questioned. The preparer's credentials and independence matter, and some lenders require an engagement letter or a signed attestation.

Longer read: Alternative income documentation compared.

On a DSCR or other business-purpose loan closed in an entity, the guarantee is what gives the lender recourse to the individual investor. It is signed by the members or owners the lender designates, usually anyone above an ownership threshold the program sets, and it means a default on the rental can reach personal assets even though title sits in the LLC. Guarantors' credit is pulled and reviewed the same way a borrower's would be. Some lenders offer non-recourse or limited-guarantee structures at different pricing, but a full guarantee is the norm on residential investor loans.

Longer read: DSCR loan in an LLC.

Personal-statement programs assume business expenses were paid before the owner moved money to a personal account, so eligible deposits count at face value; the trade-off is that only money that actually reached the personal account is visible. Business-statement programs see the whole revenue picture but discount it for expenses, and they usually require the borrower to own a minimum share of the business. Mixed use, such as running personal spending through a business account, complicates either path and is worth cleaning up before the lookback window begins.

Longer read: Bank statement loan expense factor, explained.

Principal and interest come from the loan's terms; taxes are the property tax bill spread monthly; insurance covers the hazard policy plus flood or mortgage insurance where required; association dues are HOA or condo fees. Lenders use the complete figure rather than the note payment alone because every component has to be paid to keep the property. On a DSCR loan the property's rent is measured against PITIA, and on an owner-occupied loan it is the housing portion of the debt-to-income ratio.

Prepayment penalties are common on DSCR and other business-purpose loans and are usually offered as a trade: accept a longer or larger penalty for better pricing, or pay for a shorter one or none. A step-down schedule charges a set percentage of the amount prepaid in the first year, a smaller percentage in the second and smaller again in the third, then nothing; the exact schedule and the number of years vary by lender. Consumer mortgages are tightly restricted here by the CFPB's Qualified Mortgage rules, and some states limit or ban penalties on certain loans. Because a penalty changes the math on selling or refinancing early, it belongs in the comparison before a program is chosen.

Longer read: DSCR loan prepayment penalties.

A QM cannot have negative amortization, an interest-only period or, with narrow exceptions, a balloon payment, and it must keep points and fees under a cap and the term within a maximum set by the CFPB. Since a CFPB revision that took effect in 2021, the general QM test compares the loan's price to a benchmark for comparable loans instead of applying a fixed debt-to-income cap. Meeting the definition gives the lender legal protection if the loan is later challenged, which is why QM loans are easier to sell into the standardized secondary market and why loans outside the box are priced differently.

Lock periods are set by the lender and can usually be extended for a fee. Non-QM and DSCR files often need longer locks because manual underwriting, rent schedules and entity documents take time. A lock protects against rates rising during processing; whether a float-down option exists if they fall varies by lender.

The new loan pays off the old one and, in most programs, can roll in closing costs and a small amount of incidental cash within the lender's limit, which is why Fannie Mae's guidelines call it a limited cash-out refinance. It is priced more favorably than a cash-out refinance because the lender's exposure does not grow. Common uses are lowering the payment, shortening the term, replacing an adjustable loan with a fixed one, or moving from a non-QM loan to a conventional one once tax returns can support it.

The monthly payment usually rises at the transition, sometimes sharply, because principal is now due on a balance that was previously carried interest-only, and it amortizes over the years remaining in the agreement rather than a fresh term. The rate typically stays variable, so the payment can move with the index during repayment as well. Some programs let a borrower convert part of the drawn balance to a set payment schedule before or at the transition. Modeling the repayment-phase payment before opening the line is the single most useful thing a HELOC borrower can do.

Longer read: HELOC draw period vs repayment period.

Lenders count checking, savings, brokerage and, often at a discount, retirement accounts, and they exclude the funds already earmarked for the down payment and closing costs. Requirements rise with risk: investment property, cash-out, multiple financed properties and alternative-documentation loans generally call for more months than an owner-occupied full-documentation purchase. The number of months, which accounts qualify and how business funds are treated all vary by lender and program, and large recent deposits must be sourced or seasoned before they count.

Full-documentation lenders average the net figure and add back depreciation and the carrying costs the payment already covers, following Fannie Mae's rental income worksheet. Heavy repair or depreciation write-offs can turn a cash-flowing rental into a paper loss for that calculation, which is one reason multi-property investors move to DSCR financing, where the property's rent is measured against its payment directly.

Longer read: DSCR vs conventional investment property loans.

Seasoning shows up in several places: how long you must have owned a property before refinancing on its appraised value rather than its purchase price, how long a large deposit must have sat in an account before it is treated as your own funds, how long you must have been self-employed, and how much time must pass after a bankruptcy or foreclosure. The purpose is to make sure a number the lender relies on is stable and not staged for the application. Requirements vary by lender and program, and some programs waive ownership seasoning when the property was bought with cash and the purchase is documented.

Longer read: DSCR cash-out refinance and seasoning.

HELOCs and home equity loans are the common second liens on a residence. Because the second-lien holder stands behind the first in a foreclosure, its risk is higher and its pricing generally reflects that, even when the borrower's total debt is modest relative to the home's value. Refinancing the first mortgage later usually requires the second-lien lender to sign a subordination agreement to stay in second position, and some decline. Lenders size a second lien with the combined loan-to-value ratio rather than the loan-to-value of the new lien alone.

The acronyms describe what was verified: SISA (stated income, stated assets), SIVA (stated income, verified assets), NIVA (no income documentation, verified assets) and NINA (neither income nor assets documented). The Ability-to-Repay rule, in force since 2014 under the CFPB's Regulation Z, requires income and assets on a consumer mortgage to be verified from third-party records, which ended these products for owner-occupied homes. What replaced them is alternative documentation, where income is verified from bank statements, 1099s, a P&L or assets, and, for rental property the borrower will not occupy, business-purpose DSCR financing that qualifies on the property's rent.

Longer read: Do stated income loans still exist?.

The word is mid-2000s shorthand for loans made to borrowers with impaired credit, often with little verification. Today the two ideas are independent: a non-QM borrower can have strong credit and simply document income from bank statements or assets. Programs for borrowers with a recent credit event exist, but they are a separate market from documentation-based lending.

Longer read: What is a non-QM loan (and why it is not subprime).

An underwriter verifies what the application claims: income from the documents the program allows, assets from statements, credit from the report, and the property from the appraisal and title work. Conventional files usually run through an automated system first, while non-QM and DSCR files are more often underwritten manually, which is part of why they take more work and cost more. The result is typically a conditional decision listing what must still be documented, and the loan clears to close when the conditions are satisfied.

Instead of a flat step-down percentage, the penalty is roughly the present value of the difference between the note rate and the yield on a reference security, often a Treasury of similar remaining term, applied to the balance being prepaid. When market rates have fallen since closing the penalty can be large; when they have risen it can be small or subject to a minimum. The structure is standard in commercial and multifamily lending and appears on some residential investor programs, so the payoff cost of a loan carrying it depends on the market on the day you prepay.

Longer read: DSCR loan prepayment penalties.