To The Self-Employed Mortgage Borrower – We Get You And We’ve Got You!

To The Self-Employed Mortgage Borrower – We Get You And We’ve Got You!

We have another exciting podcast this week dedicated to self-employed borrowers including 1099 earners. This market represents a huge underserved population of people. Why? Because those who take allowed deductions on tax returns can’t qualify for a home loan under Agency guidelines. Homebuyers who work in the gig economy or with 1099 earning statements can also have a difficult time purchasing a home. What is the answer? A Bank Statement loan! Host Michael Chabot talks to SVP, Portfolio Training and Development Manager Liza Pevehouse with Angel Oak Home Loans. Watch now for details on how easy it can be for self-employed homebuyers to qualify and close on a home.

We have another exciting podcast this week dedicated to self-employed borrowers including 1099 earners. This market represents a huge underserved population of people. Why? Because those who take allowed deductions on tax returns can’t qualify for a home loan under Agency guidelines. Homebuyers who work in the gig economy or with 1099 earning statements can also have a difficult time purchasing a home. What is the answer? A Bank Statement loan! Host Michael Chabot talks to SVP, Portfolio Training and Development Manager Liza Pevehouse with Angel Oak Home Loans. Watch now for details on how easy it can be for self-employed homebuyers to qualify and close on a home.

Michael Chabot 0:00
lHey guys, welcome back to another episode of Your Mortgage Matters brought to you by Angel Oak Home Loans. I’m your host Michael Chabot. Today’s show is focused on self employed borrowers, bank statement loans and 1099 loans. Why you may ask? Self Employed borrowers represent a large population of people underserved from a mortgage credit perspective for many years due to allowed tax deductions and loopholes in the tax laws that allow you to write everything off. One of my actually Sean Casey who works here at Angel Oak You know, he always says that tax returns are not used to show your income but to show what your tax taxable what’s the word I’m looking for Eliza liability. Thank you what your tax liability is Thank you. And so again also we have a lot of 1099 income earners out there independent contractors who need to use earnings statements in lieu of tax returns. And I just throwing out some stats here large population represents a lot of potential homebuyers and borrowers meaning self employed. 59 million US employees categorized as self employed and gig economy workers according to Upwork. This accounts for 36% of all employees in the United States, which is a huge number. And if you’ve listened to any of our previous episodes, you’ve heard us talk about the gig economy and how that is just a growing and growing field in the workforce. Our bank statement loan meaning Angel Oak Home Loans bank statement loan for self employed borrowers is one of the most utilized loan products. We’re not creating a new marketplace here, but instead serving a large credit population of people that has always existed. And today, we are super excited, super lucky that we have Liza Peavy house, who is the senior vice president portfolio Training and Development Manager with Angel Oak Home Loans. Liza is our product guru and the perfect person to explain why everyone should know about bank statement loans were first employed borrowers and and why a self employed borrower should call Angel Oak first. And I can tell you that I lean on lies a lot. So I’m excited and happy to have her here today. Liza, welcome to the show. Thank you so much, Michael. My pleasure. My pleasure. So, you know, let’s talk about all that stuff that I just spit out there in regard to you know, the economy to self employed borrowers self employed is a growing area and in the mortgage marketplace and in the labor force.

Liza Pevehouse 2:20
Yeah, I mean, it’s, it’s, it’s just exploded, which is awesome. We want these, you know, entrepreneurs to come come up and start businesses and all of this and just what you were talking about with their tax returns and the general underwriting world. And for traditional loans, tax returns are really the only option that they have, or it’s the traditional option for determining income for a self employed borrower. But as we know, and as you just said, Really, a tax return is not was not never designed to, you know, to actually give a footprint of somebody’s income, it’s really attacks tax liability is to determine that how much they owe the IRS. And so when a borrower goes to a CPA takes their tax return, you know, their financial documents to a CPA, that CPAs job is to write off as many legal expenses as possible. And so that lowers their tax liability, that in turn hurts the borrower when they try to go get a loan, a mortgage, because we use those same documents to qualify them for income, and then they don’t show any income, or they may even show a loss. So borrowers are stuck, they cannot get houses. And it doesn’t mean that they don’t make income doesn’t mean that they don’t earn income. So, you know, that’s where we have come in, we started this, what, about 989 years ago, the non qm or non agency, the tradition, the non traditional products, to try to help these borrowers. So that’s, you know, it’s been very exciting to see all of that, and I’m sure it’s very exciting to be able to help those borrowers out.

Michael Chabot 4:03
Yeah, so let’s, I like where you went there. Let’s take a step back before we jump into the bank statement loans and how they work and how we help. I really want to just lay out and you know, I’m not an underwriter. I’ve been a loan officer for 19 years almost. And so But typically, and I’ll let you chime in typically when you get a loan, we’re looking at W twos, we’re looking at pay stubs, we’re looking at tax returns. If you’re self employed, most self employed borrowers don’t get a pay stub, they take a draw. Right? Right. And so we need to look at the tax returns. So I’ll use some round numbers here. But you know, what we see a lot is let’s say that a self employed borrower maybe has $200,000 in income, but then after they sit down with their accountant and they write off all of their legal expenses, they may be showing 30 4050 $60,000 in actual net income after expenses. And what most people out there in the general population, you know, the consumers don’t understand is that, you know, they say, Well, hey, I made 200,000 last year. Well, yes, you did, but we can’t use it. And, you know, just as a side note, now, this is my own personal opinion, it really makes no sense, right? So let’s say you have borrower a who’s a W two, employee who makes $200,000 a year, and you have borrower B, who makes $200,000, a year as a self employed or let’s say, an independent contractor, right? borrower a, who is a W two actually probably pays about 38 to 40% of his income and tax right up front, yes, so he’s, he’s not even taking home that money, whereas borrower B is taking home all 200,000 and then figuring out where that goes, what his tax liabilities are, etc. So it’s, I feel like as a listener, you kind of have to understand how it works before we go to where we’re going and why. And I love that Angel Oak created this program because it’s such a need for for the borrower, but I’ll I’ll shut up there for a moment and let you expand on what I was saying.

Liza Pevehouse 6:04
That is so funny, because I’ve always I have an underwriting background, that’s how I started was an underwriter. an underwriter is the one who’s analyzing all the documents and given an okay on on this loan. So I’ve always found it very funny that we are looking at a W two borrower on their gross income and gross income means before taxes, so we’re not even looking at their take home to your point. But on a self employed, we’re looking at the bottom line after the expenses. So it is very, a little bit contradictory and unfair to those self employed borrowers, they’re not getting the benefit that maybe a W two borrower gets. So right.

Michael Chabot 6:49
that that that’s a perfect segue into the next question. But I love the fact that at Angel Oak, you know, I kind of feel like Superman doesn’t have a dime, I have a product that can help you. And it’s we’re not allowed to talk specifics, but attractive interest rates on those products, as long as you have, you know, good credit scores, and all those great things you have to fit the check off the boxes. But, you know, it’s a great alternative. And yeah,

Liza Pevehouse 7:15
yeah, and we’re not talking about rates that are I know, we’re gonna we’re not gonna talk rates, but we’re not talking about rates in the 10 or 12%. It’s not that, you know, it’s right. It’s it, they are competitive rate. So you’d correct borrowers should not feel like they’re going to get, you know, taken advantage of by any means, on this, we’re offering a service for these borrowers. And so yeah, it’s very exciting.

Michael Chabot 7:41
I think, I think the correct thing there to put a bow on that is it’s very competitive rates. It’s, it’s a rate that is comparable to what you’re seeing out there in the marketplace for this type of product. And it’s a make sense loan, it’s a great loan. And, you know, as, as we are getting the word out, you know, myself, my team, we’re doing more and more of them, because it’s such an underserved area in the mortgage marketplace. Right? So so let’s let’s, let’s hone in now and focus on and talk about specifically what a bank statement loan is how we qualify a self employed borrower for a bank statement loan. And then just to confirm, right on this product, before we get into that, you have to be self employed to do a bank statement loan.

Liza Pevehouse 8:24
Yes. And that we do get that question a lot. But yes, you do have to be self employed. So you have to own a business, or be a 1099 employee of a company.

Michael Chabot 8:37
1099 employees, typically an independent contractor, maybe what, you know, a gig economy worker, right? Some of those Yeah, 90, right?

Liza Pevehouse 8:47
It’s someone where the company doesn’t pay for your health insurance, you typically they’re not paying for your taxes, that kind of thing. So that’s a

Michael Chabot 8:56
direct employee. Right? So for example, I think, I don’t know any that are not I think almost all if not all, real estate agents are 1099. I believe they hang their license with a broker, they sell homes and they get paid a 1099. At the end of the year for the Commission’s I’ve earned.

Liza Pevehouse 9:13
Yes, this is a grant that we are those folks. Yes, yes.

Michael Chabot 9:17
Absolutely. So now that we got that out of the way, I’m going to let you talk about what the bank statement loan is and how we go and qualify these people using their bank statements.

Liza Pevehouse 9:27
Yeah, so it’s, it’s really great because we have so many options. So it’s not just one little pigeon holed program for this borrower. We have several options. So we’re allowed to use 12 or 24 months of a borrower’s personal bank statements, or 12 or 24 months of their business bank statements. Or we have I know we’re gonna get into this later or the 1099 program, which is a little bit different, and it’s not using bank statements. It’s just using their tenants. On so we have all of those different programs for this borrower. And really it’s, you kind of wonder, you know which program is going to work for which borrower? But we tried several different things. I mean, I know probably you, as a loan officer will ask the borrower start out with asking them which, which set of bank statements Do you think shows the most amount of deposits into your bank account, because that’s what we’re looking for, we’re just looking for cash flow through the bank account, what are the what’s the self employed income look like, for that time period, either 12 or 24 months, whichever you want to do. And then we’re going to determine that and then once we come up with all of the deposits, then we’re going to take out expenses, because they are self employed. And we know they do have some expenses, we will do a, you know, across the board 50% expense ratio, if the board doesn’t work on that, we can get a little bit more granular and have a CPA, tell us what the expense ratio is, compared to their income. So we do that we come up with an income figure based on that cash flow through those bank accounts. That’s really the premise of it.

Michael Chabot 11:17
And there are we don’t have to get into specifics, but there are when when we’re doing the analyzation of the bank statements and the deposits there are certain deposits that are not allowable.

Liza Pevehouse 11:27
Yeah. Oh, yeah. So we’re looking for what looks normal through that business account and we look at what kind of business is it so um, you know, we’ll use things you know, any cash deposits, ATM, anything that says deposit on the bank account, we’ll use transfers from from doing a personal bank statement alone will use transfers from that business account into the personal will use anything that looks like self employed income, things will back out of the calculation are any kind of loan store credits, you see those a lot transfers from a personal account, sometimes you’ll see borrowers transferring money around, that’s not income. But in general, we’ll back out a few things. And really, the idea of the program is we’re looking for what looks normal and typical for that set of 12 or 24 months bank statements. So anything like way out of the ordinary, like a super large deposit, then we’ll probably back that out only because we’re looking for what looks normal, what we think they’re gonna get again. So that’s really what we’re doing on that with the deposits.

Michael Chabot 12:39
And to simplify that we’re looking for consistency, right? We’re looking at what’s the average what’s the consistency? Usually Unless Unless there’s a reason behind it some large deposit like that could be a sale of a property or sale of an asset or some kind of inheritance or something which we wouldn’t include as income correct?

Liza Pevehouse 12:59
Yeah, a lot of times when we see like maybe legends will see large deposits right around January or February and those we find out our distribution so you know, somebody finishes out the year at the end of the year they take a big draw or a big distribution so if we see that two years in a row then that would be a large deposit that we could include and then we’re kind of getting granular but this is just kind of you know talking about like what we’re looking for.

Michael Chabot 13:29
Yeah, like I think it’s good that we get into this because these are some of the questions that people have and I know there’s also something you know so we do 12 months or 24 months business or personal bank statements a lot of people who call me say oh well i’m i’m a sole proprietor I don’t have business bank statements does that you know, remove me from this program No. One benefit that we have I know is that if you have your income going into your personal statements, but you also have business statements, you can reduce that there’s a reduction in that expense factor correct.

Liza Pevehouse 14:04
zactly Yeah, if we have if we’re going to use our personal the personal bank statements for our income calculation, but the borrower has a business account so typically we’re thinking about business income going into the business expenses being paid out bills being paid, so anything going into the personal is already net expenses so we can use 100% of those deposits into a personal account in that situation, which is really helpful on some borrowers to try to get as much qualifying income as we can.

Michael Chabot 14:36
Absolutely Yep. So on this program, I’ll just throw out some some things here as low as 10% down correct. Depending on the situation right, we have to put a little exclamation point yeah. Loans up to 3 million again, depends on the loan to value downpayment credit score, etc. primary residence second homes and non owner occupied, correct Yes, okay. Good, good. Good are you’re the experts, I want to make sure I run past you. So here’s a question I get a lot. And I want to I, you know, I did another episode a few weeks ago and asked this question, but I want to ask you is, a lot of people say, well, is this like a, you know, hard money loan? Or is this like a subprime loan?

Liza Pevehouse 15:19
Now, no, no, no, no, no, no. So after the, the 2008, crash, all of that went on those before that those loans were subprime. That that’s when the industry was doing stated income, stated assets, just, you know, some really, really risky loans. the mortgage industry has learned from that, and we have come back a lot stronger. These loans are nowhere near a subprime kind of look, does not look like that at all these borrowers are highly qualified, we still have to document the borrower’s ability to repay the loan. So what that means is, we have to be able to document the file that this borrower can has the ability, income, wise assets, all of that stuff to be successful, and be able to pay their mortgage. If we don’t do our job, then we’ll get in trouble as a lender. So you know, these borrowers are, you know, high credit scores will go down to a lower credit score, but typically, the average credit score is, you know, around 700. So, these are highly qualified loans. We’ve been doing this for, you know, eight, nine years. And our delinquency factor, is this similar as a Fannie or Freddie line. So it’s no, we’re not talking about these loans that are in there, and nobody can pay them. So now, these are not subprime loans. These are highly qualified borrowers.

Michael Chabot 16:56
Yeah, I think, you know, when I was talking to, I don’t remember if it was when I interviewed Steven Schwalb, or john Sue, but we were saying, you know, these, these loans really are the true alt a like back in the day before the mortgage market meltdown, because they’re really good loans were proving the ability to repay. It’s a great alternative. And you answered my next question, which is the profile of these bank statement borrowers? He said, most of them have, you know, 700 plus FICO scores. They’re putting down I’m guessing, on average 20 25% with most of these loans, and they are typically purchasing higher priced homes. Right, we’re seeing these loans being used more in the higher end market. Yes.

Liza Pevehouse 17:40
Yeah, for sure. We’re seeing a lot of the jumbo loan amounts, which is over the conventional loan amount. But yeah, no, they’re very, you know, high qualified borrowers. And yeah, like I said, the delinquency is so low that we know we’re doing something right. You know, yeah. Yeah, that.

Michael Chabot 18:02
Actually, I think, john, who is John Hsu, who’s in a previous episode you guys can go listen to but he talked about that the latest data is showing that in some cases, we’re performing better than Fannie and Freddie as far as our default rates. So yeah, you know, they’re, they’re really well performing. So you know, it’s important to us these Angel Oak was started because they saw a niche in the marketplace and came in and wanted to help people in trouble. And they bought up all those toxic assets, and, you know, reworked them and figured it out, and, you know, look where they grew to. So that’s, that’s amazing. So let’s, I know that you do so many of these and you have, you know, every day, you’re being pulled in a million directions by loan officers like me trying to help borrowers use these loans. So we gave you a script, we are cheating a little bit, but both of us can’t remember all the people we’ve helped. But excuse me, we’re going to talk about some of the people that we’ve helped recently, and I’ll start while you look. I have a close friend, and client who is a, he’s a wealth manager, wealth advisor, and he gets paid at 1099. And, excuse me, he had been told by every big bank across the land and you know, big and small that they couldn’t do a loan for him because he didn’t show enough income on his tax returns. He was your typical self employed borrower, high six figure income. And then after all his write offs and tax deductions, etc, expenses, very small income. And so we were able to qualify him using a one year 1099 loan, which we’ll talk about a little bit later in the show. But we were able to do one year 1099 and we’ll talk again later about some of the guidelines of this program, but we were able to get it done for him, you know, closed it in less than 30 days smooth, simple, everybody was ecstatic. So that’s my experience. I’ll let you talk about some of the items that might be jumped in.

Liza Pevehouse 19:56
It’s really fun talking to loan officers because some of them officers have really gotten good at doing these loans. And helping these borrowers they say that doing these loans is more is, it’s more satisfying than any of the other traditional products, because you know, and the borrower knows, they’re helping, they’re helping these borrowers get get into a home that they never thought they could before, you know. So it’s really, really interesting and fun. I was just talking to a loan officer, actually, this morning, and she, she just started with Angel Oak. And she is so excited about being here because of all these products that we have. And she said that she was talking to a borrower, and she owns like a little retail shop or whatever. And to qualify for something, and I’m blanking on what it was, it was some kind of assistance or something, but she had to keep her for the last two years, her net income on her tax returns down in order to qualify, and it didn’t mean that she wasn’t making money, but it was goes back to that whole thing about being able to write off expenses, and then your net income is so low, so she never thought she could buy a house. And so now she’s hooked up with one of our loan officers and talking to her about our, our bank statement loan. And, you know, so now we get our bank statements, and she easily qualifies, because she definitely has cash flow coming in. So yeah, that’s really, really exciting there.

Michael Chabot 21:26
It’s fun, because you feel like I said, like Superman or Superwoman. Because you can actually come in and give these self employed clients a great option. Yes, was not there in the past. And, you know, I mean, I’ve had clients in the past where, you know, they make seven figures or more, and they can’t buy a house because after all, the way they their their accountant has everything structured and the way they run it, by the end of the day, they don’t show very much income. And it’s the way that the tax laws are written, you know, you take a risk is being self employed is what I always say, is being self employed, you take a risk. And the benefit for that risk are some of the write offs and things that you can take to minimize your taxes. Right, exactly. Unfortunately, when it comes to getting a loan, we’re looking at tax returns to verify income. Exactly, yep.

Liza Pevehouse 22:14
Another loan officer had a loan where the borrower was an immigrant so she was finally became a citizen and all of that, and she had owned here a nail salon for many years, but could never really qualify with their tax return. So So imagine coming to a new country, never thinking you’re in the greatest country in the in the world, but you never really feel like you could actually own a piece of property. And, you know, he was able to help her with her bank statements to get into a house. So that was, you know, a really cool story there.

Michael Chabot 22:52
It’s so gratifying when you can help somebody achieve the dream of homeownership. It really is. Yeah, it really is. I know that I’m looking at kind of the list here that we have, I mean, I know that we save a lot of loans that that go to a jumbo, you know, or maybe a retail bank or big institution, and they can’t do them, and they come to us, and we’re able to save them. I think since I’ve been here, I’ve done three or four of those already to where, you know, they say, oh, you’re good, and they get an escrow. And then all of a sudden, they say, Oh, we can’t do your loan.

Liza Pevehouse 23:22
Yeah, and honestly, like, especially on the jumbo side, a lot of the jumbo programs require, like a huge amount of reserves, you know, you know, could be 12 1824 months of reserves, which means you could pay you know, you have enough in the bank to pay your mortgage for 12 or 24 months. So, our programs are nice, you know, yes, they’re highly qualified. But we don’t we don’t require that huge amount of reserves which interesting fact, some of our loans that have gone delinquent over the years, we do analyze those and it didn’t seem that reserves really played a huge impact, which is kind of interesting to me. So anyway, so our bank statement program, most of our programs only require six months reserves which is lower than say, like a really a prime jumbo which is that a paper prime jumbo loan.

Michael Chabot 24:24
Some that require 24 months of post closing reserves, which could you know, if you’ve got a payment, that’s 567 $1,000 a month on a big loan. Yeah, that’s a lot of money left on bank, right? It is. So I know we kind of talked about this, but let’s just go over it again, real quick for everybody who’s listening because you know, we have consumers, we have real estate agents, we have other loan officers. So a client wants to apply for a bank statement loan, how do we verify and determine the income on this loan?

Liza Pevehouse 24:53
iOkay, so what we’ll do is we have the borrower fill out a little questionnaire. It’s really Form just tells us, you know, what their businesses what, what their percentage of ownership is, they just kind of give us some upfront information. And then when they send that back, they’ll send the loan officer, you know, either 12 or 24 months of their personal or business bank statements, we take those in. And what is great about our process is you can do all of this upfront. As soon as you are talking to your borrower, go ahead and gather those bank statements. And then the loan officer will submit that to our team, our operations team, and they will go ahead and calculate that income upfront. So you don’t have to wait and do all the other paperwork and get it into underwriting to then find out Oh, we don’t have income here. So that’s nice that we’ll do it up front. And so yeah, all we’re doing, what we’re doing is we’re going through the bank bank statements and looking at adding up all the deposits the usable deposits, and then we’re subtracting out an expense ratio. And then we divide that by the number of months that that income covers 12 or 24. So that is really what that’s really it’s as simple as that. And then if the borrower is using business bank statements, and they have partners that will use the borrower’s percentage of ownership of that income, as well.

Michael Chabot 26:26
So yeah, yeah, so here’s what I like that you talked about is it gives you It gives, it gives the the buyer or the prospective homebuyer or could be refinance. So let’s just say the prospective person, it gives them peace of mind, because we’re doing the income calculation upfront. Yeah, right. So we know what the allowable income is. Number one, if I’m, if I’m a real estate agent, listening to this, it gives you peace of mind because you know, the income has been verified. And you know, you can actually get them under contract to purchase a home and know that they can qualify. And if you are a loan officer listening, listening to this, and you’re somewhere where they’re not doing this will this is important to you, because it gives you peace of mind. And what I love is, you know, like you said, I mean, there are you know, we look at the income, there are things that we take into consideration, expense factors, etc. And just I know you said it earlier in the show, but again, so the kind of the base is 50% expense ratio, right? That’s kind of our default ratio. Yeah. And then, you know, if your expenses are less, excuse me, your CPA can write a letter stating what your actual expense ratio is, right?

Liza Pevehouse 27:38
Yes, yeah. So we do allow that, I mean, we try to just do the 50%. just for ease of the process, we don’t want to have to get a CPA letter to state the expense ratio on every single loan, if there’s enough income for it to work on 50%. That’s just kind of a, you know, a conservative approach. But if the borrower doesn’t qualify on that 50%, and the expenses are actually lower, and it makes sense for that business type than we’ll certainly use whatever the CPA states it is, we do have a, we do have some minimums like a floor, I mean, we don’t want a CPA to say, Oh, you know, it’s a 1% expense ratio, that is a little unrealistic. And a CPA would do that. But we, you know, we do have some floors built in, but for the general purpose will, will honor whatever the CPA states. Yeah,

Michael Chabot 28:29
yeah. And I think really, the way to say that is, at the end of the day, we’re still Responsible Lending, we’re doing what makes sense, you know, and I would, I would imagine that like, just some examples, a retail business or restaurant, stuff like that, who carry inventory, they’re going to have much higher expense ratios than maybe a realtor or a, you know, somebody who’s doing a, you know, 1099 running a sole proprietorship, or something like that a service business is gonna have a lot less.

Liza Pevehouse 28:55
Yeah, as far as Responsible Lending, I mean, we’re not going to use a 50% expense ratio for a car dealership, which, you know, carries huge inventory, high dollar inventory. So that one we’re going to use, like, 70%, we do have like a little list of business types that we’re going to definitely use a higher ratio, just because that just makes sense, you know, but in general, just a regular person. You know, that’s not carrying a bunch of inventory doesn’t have like a ton of employees, we can certainly do the 50% across the board. So

Michael Chabot 29:32
great, great stuff. I like where we’re going. So if I’m a self employed borrower, we’re listening to this right now. What would you say to them? What’s the first thing they should do if they been turned down everywhere else?

Liza Pevehouse 29:42
Yeah, I mean, I would seek out you know, Angel Oak Home Loans, you know, our loan officers, and I would just say, you know, I’m self employed and I’m having trouble getting qualified with tax returns. It’s okay to say that because you Most likely your loan officer is going to want a copy of those tax returns because we do want to try to put the borrower in the best program. So if they can make it work, if your loan officer can make that work with the tax returns, we’re certainly going to do that. And then we have the bank statement program as a fallback as a as an alternative, if it doesn’t work that way. So that would be your first thing is call your loan officer and let them know that, yeah, don’t be afraid to say I’ve been turned down somewhere else, because my tax returns don’t show income. Don’t be scared to say that, that’s, we know that that’s happening. So and that’s what we’re here for. So and then yeah, just be prepared to pull your, your bank statements together and email those or upload those to our system. And your loan officer will take it from there. Like I said, we’ll be able to tell you within, you know, days, whether or not there’s enough income to qualify, you know, that kind of thing.

Michael Chabot 30:56
Yeah, I mean, average response times are, you know, usually get an answer within 24 to 48 hours, you know, and I think you you made a good point there is for sure, myself and my team, even if you’re self employed, I know it’s I tell my clients Look, it’s it’s the only investment you have up front is your time, let’s get your tax returns, let us we’ve been doing a long time, we’re really good at what we do, let us look at it, maybe the other loan officer miss something, let us look at the tax returns first. But be prepared, have ready to go your 12 or 24 month bank statements so that if we can’t go that direction, we can quickly pivot and go in that direction. And that’s really I think, for any self employed borrower listening to this is, number one, no, you have options. Right? You’re not, you’re not wearing the scarlet letter, you’re not a leper, like you have options, right? We like you, we want to help you get alone. And, and, and number two, it’s really important to work with somebody that has all of those tools and options at their fingertips. Right?

Liza Pevehouse 31:58
Exactly. Yeah, yeah. And what’s great about you guys is you have direct contact with the underwriters, I mean, you can call them up on the phone and say, Hey, you know, how can we make this work or what’s an alternative to what you’re requiring, or, you know, we, we are here to try to make the loan, we want to make the loan work. So we have, you know, good communication from, you know, our sales team to our operations team, which is really key.

Michael Chabot 32:28
I think, for everyone, I think you make a really good point because we’re not sending these loans outside for somebody else to underwrite and process and crossing our fingers and hoping they work that’s the great thing is you know, we have you that we can reach out to at any time and say, Hey, can you jump in? I did that earlier this week. Hey, can you jump in? Take a look. What do you think? You know, and and we control it in house. And I know we are allowed to say this, we’ve talked about it on across our we call these portfolio loans or non qualified mortgages, right? Just because that doesn’t mean they’re bad. It just means it doesn’t fit within the qualified mortgage, you know, box, right. But we we also do make exceptions on these loans, if they make sense, right? And I think correct me if I’m wrong, I’m hearing right now we’re averaging about 30% we’re making exceptions on about 30% of them so just because you have and the reason I bring it up lies is just because of borrower or somebody listening or maybe it’s a realtor with a client that has maybe something that’s the whole credit profile might be really strong there might be great compensating factors that we can look at and maybe say yeah, we can do that.

Liza Pevehouse 33:41
Yeah, I mean, we we had the ability because they are manual underwrites which means that you don’t have some computer telling you if the loan is approved or not. Right. So these are manual underwrite These are real people looking at the credit profile, kind of old school, you know, determining Do I really think the borrower can pay this loan. So because of that, we have the ability, okay, it doesn’t quite, you know, meet the whatever the credit score is, maybe we’re a couple of points lower, but you know, what, the bar actually pays, you know, pays well, you know, there’s not a bunch of missed payments on their credit report, or, you know, they do have like a ton of assets that makes us feel like okay, you know, if something happened, they could they could make their payment. Or, you know, maybe they have long term on you know, they’ve owned their business for years and years, that stability of income, that’s a great compensating factor. So we have all these things that we can look at. And then so if it doesn’t quite meet fit the box, then we’re allowed to make an exception on that loan. Our Angel Oak Capital, there are, you know, under the umbrella of Angel Oak companies, they buy all of our portfolio loans and so we have Have a great relationship with them. As long as we can back up why we made that exception, they have confidence that, you know, we know what we’re doing. And it’s a great, you know, collaborative effort as far as that goes. But yeah, kind of our Lions have exceptions on them.

Michael Chabot 35:15
I think that’s a good point that you bring up. And we talked about this in previous episodes, which is why we are it, what I like is that we’re not pushing these out, we’re keeping them in, you know, Angel Oak Capital is taking them on it, we’re doing good loans, because obviously, the more good loans we do, the more they’re going to be able to securitize and do out there. So I wanted to kind of transition now into the 1099 loan, because we kind of, we can talk in bank statement bank statements. So let’s just quickly, you know, talk about the 1099 borrower, and then the 1099 loan.

Liza Pevehouse 35:51
Yeah, so the 10, nine, nine borrower, a 1099 bar looks a little bit like a W two borrower. But they actually, like we said, it’s the way their employer pays them. They don’t, they’re not taking out tax, the federal and state taxes, that kind of thing. They’re not usually paying for their health insurance that so it’s a different way of being paid. But they are technically a self employed borrower. As far as the industry, the mortgage industry looks at them, they file their Tat, their income on a schedule C, which is a tax form for us for a self employed borrower. So So as far as we look at them, they’re self employed. But what’s nice is we do have a program that is a lower documentation loan for these 10 nine on borrowers should you want to go that route versus a bank statement loan, you can still do a bank statement loan with a 1099 borrower, but we just have this other avenue, which is all we get is there either one or two years to 99. And a year today pay statement for 2021. And so it’s, that’s all you have to get. And so we add up all that income, we take out an expense ratio, and we come up with an income figure with that. So you’re not getting tax returns. So we’re not looking at what they’re actually writing off. As far as expenses go, we’re just using that expense ratio, the estimate again, and so yeah, it’s a super low documentation line, very easy, we do a lot of realtors on these because, you know, that’s typically how they’re paid. So it’s really great for like a real estate agent who wants to buy investment properties, you know, using their 1099, super easy, as long as they qualified, you know, with their debt to income ratio, and all of that.

Michael Chabot 37:42
And not that we want to get into like major specifics, but there are a few things, you know, boxes, we have to check off, you have to be 1099 for at least two years, with the same company, right?

Liza Pevehouse 37:54
Yeah, it’s not, we don’t have it set up to where, you know, a lot of some borrowers are kind of contract workers where they are 10, nine on employees of like, lots of different companies, or they jump from one company to another, that gets a little bit dicey and hard to really know what they’re going to get in the future kind of thing. So really looking at one stream of income from the same employer. So that is Yeah, that is definitely a rule guideline on button nine on program, same employer for two years.

Michael Chabot 38:27
Yeah. And somebody who’s jumped around or as a contract worker, like that would be better off doing a bank statement loan Anyway, I’m guessing. Yeah. Yeah. The other question that I had was, there is also an expense ratio with the 1099. Loan correct. Looking at expense ratios, pretty much the same falls in line with the bank statement program.

Liza Pevehouse 38:46
Yeah, we’re gonna use a 50% default. And if you qualify on 50%, there’s nothing else we need to get. But if you don’t qualify on that, you’re allowed to get a CPA letter. And we’ll actually use down to a 15%. So a super low debt ratio for those 10, nine, nine borrowers, which, typically 10, nine, nine is not going to have a whole lot of expenses, typically, if they’re really working for another company. So we do allow that that low expense ratio if the CPA will support that state that Yeah, yeah.

Michael Chabot 39:19
And again, it’s just another great program that is allowing those that have, they’re just outside the normal, small, little qualified mortgage box, right? And so I love that we’re giving them options now. So let’s pivot and talk about what all this means to if you’re a realtor listening to this, right, so what does this mean to a realtor who’s listening? I know you know, look, you’re in the trenches everyday doing these loans, but but let’s take you out for a minute and talk about like, you know, if you’re a realtor listening to this, why is this important for you to know number one?

Liza Pevehouse 39:54
Yeah, I mean, well, we want to try to increase your revenue. As well as a real estate agent to have access to borrowers who otherwise couldn’t get mortgages. So yeah, just getting the word out, you know, talking to CPAs, financial advisors, wealth, consultants, all if you get the word out to those folks that we have a bank statement program, then they don’t have to advise their borrowers to, to now wait two years to get two years of tax returns that show enough income, they could refer these borrowers who want to have lower tax liabilities, to, you know, you guys are real estate agents who can then refer you can refer them to us. So just letting them know that there are options for these borrowers is is huge.

Michael Chabot 40:47
For sure. I agree. And I think it’s, it’s about, you know, if you’re a realtor listening to this, number one, educate yourself, you know, because there’s a lot of great products. And then, like you said, Go and talk to CPAs and financial planners, and educate them on the products that are out there to help their clients purchase who are self employed, or 1099 borrowers. And I think it’s, in my opinion, lies, I think real estate agents need to get a little more comfortable asking their potential clients qualifying questions up front, like, you know, so what do you do for a living? Oh, are you 1099? Are you self employed a W two. And if you’re educated, then you can say, Well, great, because I’m aligned with somebody who actually has other options for you. So he’ll he or she will look at all avenues for you to look at, you know, tax return, you know, qualifying conventionally with tax returns, etc. So I think that is, I think that’s a huge thing as the market continues to change. Don’t you agree?

Liza Pevehouse 41:49
Yeah. No, it’s so funny, because, yeah, I just wonder how many real estate agents really talk about that with their borrowers. But I think, you know, when you’re getting to know your borrowers, I think just kind of, oh, what do you do for a living, just getting to know them? And then just throw that out there, say, you know, oh, you’re self employed. I’ve got a lender, if it doesn’t work out with the lender you’re working with, or if you want a recommendation, I’ve got one that has a ton of different options. So if you don’t work traditional, they’ve got other options for you. So yeah, I think that definitely is very interesting.

Michael Chabot 42:27
Well, and it goes back to the one of the stats that I gave at the very beginning of our recording, which is 36% 36% of all employees in the United States fall into that self employed or gig economy type worker, that’s a huge way for you to number one, increase your business and your revenue, and to help more people to give back to make a difference in your community. Because, you know, a lot of a lot of agents, you know, and I understand why, but they’re there. Sometimes they’re hyper focused on, you know, who they can help now. And so I think it’s really for all of us, whether you’re a consumer, whether you’re a loan officer, real estate agent, it’s about educating yourself and understanding these products and how they work and how they can help more people.

Liza Pevehouse 43:11
Yeah, exactly. Right. Yeah, because.

Michael Chabot 43:15
We could say the same thing about builders, right? Home Builders typically have a relationship with a lender, that lender typically does all of your vanilla stuff, you know, 30 year fixed all that good stuff. And I’ll kind of give you a sneak peek I’m doing another episode here in the near future with somebody who works with a lot of builders and does this and came in and basically said, Hey, let me give, let me have a chance to save some deals for you, you know, and they sent them 10 deals, they saved six out of 10 that they couldn’t get done. And of course, that blossomed into a giant nationwide relationship.

Liza Pevehouse 43:51
So well, then obviously, we heard lender, you know, correct. karate saved a few deals, so yeah,

Michael Chabot 43:57
right. And, and that’s really it goes to and it’s not the fault of the builder, they didn’t even know the product existed, right? And so, so my point to us, if you’re a real estate agent listening to this, the products exists, there’s a lot of things that are out there today that can help that are good loans, that’s also the other thing that we want to stress. They’re, they’re good, good loans. So, again, we’re really getting to the end of our recording, and I just want to you know, ask you, is there anything else that you want to add? Is there anything I haven’t asked that maybe we should talk about?

Liza Pevehouse 44:30
Um, oh, boy. I feel like we’ve covered it. I mean, I really do feel like um, yeah, I think really knowing that we do go up to the 10%. I do want to stress that that, you know, a lot of people might think, Oh, it’s alternative income. It’s going to be I’ve got to put a lot down, you know, so we do go up to that 10% down 90% LTV threshold So, you know, if you have the credit score, obviously to qualify for that, but, um, so that’s, you know, that’s a good thing. So you don’t have to feel like you’re gonna get, you know, you have to put a lot of money down on that. But, yeah, I think um, I think just getting the word out and letting regular people know that we have these products for them. That’s really just the biggest thing we’re trying to stress right now is trying to get the word out, you know.

Michael Chabot 45:25
And that you have options. And I think one other thing that you said that I just wrote down is, you know, obviously there’s there’s checks and balances criteria, depending on your credit score, etc, we can go up to 10%, down, depending on credit score, etc. But the nice thing is there’s no mortgage insurance. Yeah, right. So typically, on a conforming a Fannie Mae, Freddie Mac, or prime jumbo loan, you put less than 10% down, you typically have an additional payment of mortgage insurance that can stay with you for quite a few years. You can do something else called lender paid where it’s built into your interest rate. So then you’re taking a higher interest rate and paying that for the life of the loan. So just another benefit is that, yeah, there’s no mortgage insurance, there’s no additional payment if you don’t have that 20% to put down. Exactly right. Yeah. Yes. One last question in regard to this, when can you be a first time homebuyer and use this program?

Liza Pevehouse 46:16
Yes, you can. Um, one thing we do, are very interested in on our, you know, our portfolio loans, our bank statement loan, and specifically is documenting a housing history. So that is one thing, we don’t want to give a loan to a borrower using alternative income, if we don’t know that they’ve been able to make some kind of housing payment in the last 12 months. So that is a big thing right now. Because we did, we used to do a few of those. And we did figure out that alternative income, and no housing history was not quite a good combination. So So yeah, we do want a housing payment. So if you have a housing payment, you’re good. If your rent for a living with mom and dad, probably not going to want to go with a bank statement route. But yeah, so that would be one thing. Little add on there, too.

Michael Chabot 47:13
Absolutely. And just to clarify, so when you say housing payment, it can be either a mortgage, or I could be renting an apartment somewhere. Yes. And I can use that housing history to show that I’ve been able to make payments for at least 12 months.

Liza Pevehouse 47:25
So to answer your question, you would be a first time homebuyer if you’re currently renting. And that is completely fine as long as we can prove that you have been paying a rent payment. So that that’s all that that means.

Michael Chabot 47:37
This is not on our script today. But I’m gonna ask you this question. It’s a it’s a it’s a, it’s a personal opinion question. Where do you think as far as as the market continues? Where do you think do you think that the self employment employment market and the self employed homebuyer market so meaning, we get more and more self employed borrowers in the economy? Is that your opinion? And then my second half of my question is, do you agree that the self employed homebuyer market is going to continue to be a larger and larger portion of what we do?

Liza Pevehouse 48:07
Yeah, I mean, our bank statement program we have a an array of quote unquote portfolio products, but our bank statement product is definitely our most popular and so yeah, I mean, I think the more word we get out that we have this program, we’re going to get more and more self employed borrowers as our borrowers and and yeah and we’ll get more of those into homes for sure. I think it is definitely on the on the rise and yeah, it’s a great it’s a really great program for this

Michael Chabot 48:43
I agree and yeah as we wrap this up what I would say is the message to anybody listening to this if you’re self employed is that you have options and they’re good options you’re not going to be left out in the cold anymore we can get you into a house and you know I would say is that if you especially if you’ve been told no by other banks, you know, definitely reach out to us because this is really what we do everything really well. But this is really where we kind of you know, earn our earn our grades we do really well at this stuff. So ladies, I just want to thank you for taking the time today. I know you probably have 50 loan officers waiting to talk to you to to help them structure these deals, but we really appreciate your expertise and your time today.

Liza Pevehouse 49:24
Well this was really really fun. I’ve never done a podcast before. So this is the first time and it was it was really fun. I enjoyed talking to you, Michael and just you know, I look forward to working with you a lot in the future.

Michael Chabot 49:37
Me as well and he did an amazing job. And for those of you that are listening again, this is Your Mortgage Matters sponsored sponsored by Angel Oak Home Loans. If you enjoyed this, please like it, share it, send it to your friends, and we’ll be back to you again real soon with another episode. Thank you again for listening.