3 Tips for Lenders Looking to Enter the Non-QM Loan Space

Chris Ledwidge, EVP of theLender, has come a long way from his first role in the industry as an assistant LO at New American Funding over a decade ago. In 2019, Chris channeled his mortgage experience to co-found theLender, a non-QM-focused lending business based out of Lake Forest, California. Since its inception, theLender has thrived, experiencing an eye-popping 20,900% revenue growth over the past three years, a feat that landed it at #11 on the prestigious Inc. 5000 list.

How did theLender achieve that level of growth? Chris attributes his team’s success to finding a niche in the market, optimizing his business systems and expertise around that niche, and meeting the needs of an underserved segment of borrowers. Namely, non-QM offerings—including bank statement loans, asset depletion loans, gig worker loans, and DSCR loan products—have provided strong opportunity for volume in a challenging market.

We recently interviewed Chris on the Clear to Close podcast to chat about theLender’s non-QM strategy and the lessons he’s learned by building a company centered around less traditional products. The conversation gives us insight into the risks and rewards of the non-QM space and lays out some important best practices for lenders looking to capitalize on niche loan products.

1. Focus on niches where you hold expertise and can add value.

Non-QM loans, which have nearly doubled their market share in 2022 after falling to 2% during the pandemic, are a hot topic in the mortgage market. Especially as profitability falls (the MBA’s latest data reported an average net loss of 5 bps on loans originated in the second quarter of 2022), lenders are looking for outside-the-box ways to recoup volume and find opportunity. For many, non-QM offerings represent a chance to serve wider borrower needs.

“Lenders need to be thinking of alternative ways to produce income. The refis are gone for now, and on top of that, we have less homes being sold. Inventory’s stacking up, but there’s still not a lot of inventory out there,” explains Chris. “You’ve got to make up those originations somewhere. Products like non-QM can help fill that void.”

Still, stepping into the non-QM space invites new risk and requires a level of expertise not all lenders possess. Chris and his partners, for instance, built up their knowledge around non-QM over several years. By working in the builder world, Chris was exposed to niche loan products, which eventually made the creation of theLender a natural progression that allowed him to share value and expertise with his team and customers.

“We had a long runway of time where we were originating these products and creating systems and processes around it to excel at it,” explains Chris. “We got to focus on an underserved market, bringing our expertise and value to that to capture volume and sales.”

2. Prepare to invest in technology and lead generation.

Just like in the QM loan space, your non-QM strategy won’t work if you don’t focus on operational efficiency and generating continuous volume. Here, you’ll need to create an infrastructure and seek out valuable technology provider partnerships early on so you’ll be able to optimize each step of your process and drive down costs, setting your business up for longterm success.

“The longer you wait to implement technology, the farther out into the ocean you’re going to drift, and it’s going to get harder to get back to the mainland,” advises Chris.

Especially if you’re newer to the non-QM space, creating peak efficiency and a strong funnel is vitally important since you need to generate enough loan volume to cover your costs. Plus, well-functioning systems allow you and your team to focus on your most important tasks: selling, finding new customers, and providing a top borrower experience.

To connect with those new customers, you’ll need to deeply understand the demographics you’re looking to serve. This means getting into the mind of a borrower who may not qualify for QM offerings and asking yourself: What professions might this person hold? Where do they spend time online? What Google search terms would they be likely to input?

By researching your target customer, you’ll be able to create content and marketing materials that speak to their pain points and goals and that educate them on various non-QM products that may suit their needs. These materials will build a natural funnel positioning you as a go-to-source for non-QM information and driving your leads to set up a meeting to learn more about your services.

3. If you lack the knowhow and systems, consider partnering.

Does all of the above advice sound like a lot to tackle? The truth is, for many lenders, entering the non-QM space involves an outsized amount of effort and risk that doesn’t make sense for their business. In this case, lenders should consider alternative methods and partnerships to take advantage of non-QM demand while avoiding many of the downsides and operational headaches normally involved.

“Brokering is a fantastic option because you plug into a system designed for that,” explains Chris. “You’re not taking on the risk and trying to spin up something new within your own four walls. You can try it for the next three to four years and decide down the road whether you want to flip it to some kind of correspondent relationship.”

Leveraging non-QM through a broker channel works for many lenders since it alleviates much of the effort related to finding customers and underwriting new products. Similarly, comprehensive “mortgage-in-a-box” solutions like Maxwell Private Label Origination provide all the resources, infrastructure, and expertise lenders need to launch new loan products quickly and painlessly. These partnership-style methods of entering the non-QM space help lenders to capture a piece of the non-QM pie while allowing them to stay focused on their core competencies.

Want to learn more about finding your niche in the non-QM space? Click here to listen to the full Clear to Close episode featuring Chris of theLender.

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