Loan Officer Training - 10/02/2024 - Navigating 1099 Mortgage Loans: A Loan Officer's Guide to Self-Employed Clients

Are you ready to master the art of working with self-employed clients? In this episode of Loan Officer Training, we break down everything you need to know about navigating 1099 mortgage loans. Learn how to effectively evaluate income, overcome common challenges, and provide tailored solutions for self-employed borrowers.

With practical insights and actionable tips, you'll be equipped to build trust with your clients and close more deals in this often-overlooked market. T

une in and elevate your skills to confidently serve the growing community of independent professionals seeking homeownership.

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation! 

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access thousands of mortgage programs using Alternative Income Documentation such as Bank Statement Mortgages, P&L Mortgages, Asset Based Mortgage Programs, No Ratio CDFI Loan Programs, DSCR Investor Mortgages, Commercial Mortgages, Fix and Flip Mortgages and thousands more!

Our Mortgage Loan Originators are trained to be loan consultants to guide borrowers throughout the entire loan process. A licensed Loan Officer is only a phone call or

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Catch all the episodes of the Loan Officer Training Podcast at https://themortgagecalculator.com/Page/Loan-Officer-Training-Series-Podcast

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The Mortgage Calculator is a licensed Mortgage Lender (NMLS #2377459) that specializes in using technology to enable borrowers to access Conventional, FHA, VA, and USDA Programs, as well as over 5,000 Non-QM mortgage loan programs using alternative income documentation!

Using The Mortgage Calculator proprietary technology, borrowers can instantly price and quote thousands of mortgage loan programs in just a few clicks. The Mortgage Calculator technology also enables borrowers to instantly complete a full loan application and upload documents to our AI powered software to get qualified in just minutes!

Our team of over 350 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USDA mortgages as well as access...

Transcript

Restream recording Oct 02, 2024 • 04:01:45 PM: 0:13

So welcome everyone. My name is Kyle Hiersche I'm the COO of the Mortgage Calculator joined here by our president Nick Hiersche and our CSO Jose Gonzalez We are a lender that specializes in non QM loans And what we do every Tuesday Wednesday and Thursday at 12 p. m Eastern on the show is go through a different loan officer training topic Today's topic is a great topic that we love here at the Mortgage Calculator, which is navigating 1099 loans Definitely an amazing program. So Jose I will go ahead and let you get right into it. Let's talk about 1099 loans and how to originate. Oh, right. Yes. Great topic. Nice outside the box solution. Um, this is one that you definitely want to have in your arsenal. to be able to help borrowers meet the lowest cost option for their loan needs because 1099, the 1099 option is usually, is often overlooked. Uh, and, um, people tend to choose the bank statement option, which is a great option. The most popular non QM option, I do believe right now, bank statement loans. Uh, but I really think that 1099s are being underserved, uh, because of lack of awareness. And that's why we're here today. Letting all of our loan officers know how to navigate those 1099 mortgage loans when dealing with your self employed borrower. So let's get right into it. Now, what exactly is a 1099? I think that's the first thing that we, we have to address here because many times, um, MLOs and borrowers alike may look at the 1099 in a similar way as they look at a W 2, right? It's a form coming from my employer because in some cases. That's how the borrower views the relationship that they have with the contract, you know, with the company that's contracting their services because when they're 1099, they are an independent contractor or should I say when they're 1099, you know, um, contractor that they receive a 1099. That's exactly what they are. They're an independent contractor. They are responsible for their own, uh, taxes, right? There are no So, payroll taxes deducted from the borrower. So the 1099 document, um, but displays their full gross income, right? Gross income, no deductions, borrowers responsible for their deductions. And that's where the 1099 loan, um. 10 has come into play because as most self employed borrowers, there's going to be business expenses, there's going to be deductions, and there's going to be a net income. So if you were treating your borrower that receives 1099s from the company that contracts your services, And you're going the traditional full doc route, then you would need tax returns, either one year or two years, depending on the loan program, depending if you're going FHA, that always requires two years for full dot for all loans, or depending if you're going conventional and you happen to get a one year finding either through DU or through LP, because a borrower has been in business for at least five years, that's an LP option automatic. So Full doc, traditional, you're going to need the tax returns and you're going to do your income calculations. All those business expenses are coming to play because you're going to be looking at the net income either that they reported on their Schedule C. Right. Usually that's where 1099 income is going to go unless they may have some type of an LLC set up and maybe they have the LLC income running through an S corp as I've seen sometimes or they have a partnership. Uh, there's going to be a 1065 partnership report to look at for income calculations. All of that is going to be for your borrower, traditional income. a full dog that receives 1099s just because a borrower receives 1099. Documents from the company, the contracts and for their services. I can't really say their employer. Right. Um, that does not mean that you automatically have to go non QM, all doc 10 99 loan option, which is what we're going to discuss today, right? Cause the lowest cost option, if full doc with tax returns does work out for them is going to be, uh, for a primary borrower, at least it's going to be the agency loan. Right. 3%, 5 percent down, full duck. However, for those scenarios where you do your income calculations and the numbers just don't add up, DTI is way higher than it should be. That's when we go to our alt duck options. And today it happens to be when our borrower is self employed and receives a 1099 document and they have a lot of write offs, we have the great example. That's The great option, which is this loan that uses 90 percent of the income that is stated on the 1099 form. So it says there that form is issued to sole proprietors, independent contractors, partnerships, and LLC for non employee compensation only. And it's also stated here it is only for self employed borrowers. Allowing 90 percent of the borrower's gross tenant income to be used for qualifying. That's why I was saying this is a underserved program compared to bank statements because on your best day, best case scenario, The bank statement option is going to allow for 80 percent of the deposits to be used for income with a default of a profit margin of 50%, meaning they had a 50 percent expense factor by default that can get reduced depending on the option you choose. Sometimes there's a table. that categorizes business types, employees type of business, then they give you an expense factor or other times it can be adjusted via a letter from the tax preparer slash accountant slash CPA to state what the expense factor is for the business and give an adjusted income that way. However, The 1099 is always 90%. So now I think that as we create more awareness and there's more borrowers that may be getting 1099s that are applicable for this, like. One of the, um, a real popular, uh, uh, uh, categories for this would be real estate agents, right? All real estate agents receive a 1099 from their broker, uh, and they usually, and they have to have only one broker. And, uh, most of the 1099 options do require the 1099 to be from one broker. source only. Most of them, not all of them, but most of them. Now it's really important to note they'll state in the guidelines, you need two years self employment, two years of history self employment, uh, of the business existing two years. However, as you know, at the Mortgage Calculator, we do have a lot of outside the box solutions. So we even have outside the box solutions. For the outside the box solutions like the 1099 because we have an option that allows, uh, origination and funding of the loan for a borrower with less than two years employment with these conditions present, it could be a borrower that previously worked for that company. As a W two employee and it's now working for them as an independent contractor. Um, I just recently had this one, uh, that occurred with a doctor. He was previously working for a hospital as a W two employee, and now he's an independent contractor just for the same hospital getting paid to his LLC. So that, that one, uh, ended up working there and he only had 12 months. Of, uh, uh, proof of that. And we got it. Another example could be that the borrower previously worked that job type. So not necessarily for the same, uh, contract, you know, for the same company is contracting them, but just the job type as a W 2 employee. And it's now working as an independent contractor for the same company, but it could also be for another company. It doesn't have to be the same company, just doing the same job type. That'll work. And one that's a little less well known, uh, but very common is the borrower previously worked that job type as a licensed W 2 employee. The licensed part is the critical component here, such as an electrician, for example, and it's now self employed as an electrician only has one year proof of being self employed, maybe has their LLC to prove when they formed it. Or a letter from the accounting or tax preparer that states, uh, how long they've been self employed, you know, the third party verification letter from the quote unquote CPA will always, uh, verify self employment, uh, for example, when they're a sole proprietor. Because the, uh, the electrician we see there, it could be a sole proprietor, doesn't have an LLC, uh, doesn't have a corporation, but his accountant states in a letter, uh, yes, he stopped working for XYZ company on February 2023. And in March 1st, 2023, um, started, uh, his new endeavor as a self employed electrician. And now you have March and October. So we'd have one year and six months. So we definitely would have our 12 months that we need for, uh, approving them with less than two years self employment. So that's a really, really, really big one to remember and take into consideration when you're structuring your deals. So let's talk a little bit about what type of borrowers, LTVs and the like, FICO scores that for structuring our 1099 borrower loans. As previously mentioned, self employed borrowers only. Now, That does not mean that your borrower cannot also have W 2 income, maybe have 1099 income, where they're doing it with a 1099, and maybe they have W 2 income doing something else, or maybe even doing the same thing. That happens, uh, for example, with nurses. A nurse could still be working W2 for a, for a hospital, right? And they're doing their 30, 35, maybe even 40 hours a week, getting 40, 50, 60 an hour plus overtime and all that good stuff. And then that nurse could also be contracting out their services to an agency and the agency pays them with a 1099 because, you know, they have a LLC possibly even for that, not required, but they're getting a 1099. from that agency. Then you got 1099 as well. But now remember, if you know, those are two separate jobs, there's going to be other considerations to be able to use both streams of income. Usually you have to be doing both streams of income for at least two years to be able to get the income from two separate jobs, regardless if one is self employed and the other one is W two. But that's just another example. But definitely self employed borrowers, right? Perfect for realtors. Uh, 90 percent max LTV as is usual and customary for, um, all non QM loans because this is a non QM loan option. Now, we do have an option for rural properties up to 20 acres. And 80 percent LTV for those of you in some of those areas are getting some of those types of loans. That's a really good one to note. Uh, minimum credit score is a 600 at an unbelievably high 80 percent LTV for a 1099 option that is applicable for both, um, primary and investment properties, 80 percent LTV max with a 600 credit score. Primary second home investments and non warrantable condos up to 80%. That's another welcome, uh, Point there, your non warrantable condos or your condos that may have issues with the association litigation. Um, but you know, all the different components that affect, uh, condos, uh, when you can't do a full review. So 80 percent LTV with a 1099 entity vesting allowed for your investors. Really important LLC, S corp C corp partnership of some of the more common entities, not the only ones allowed, but those are the four most common ones. And as far as citizenship, this is the, or, you know, uh, status. This is a very important one to note, right? Pay attention here. Okay. U S citizens. Green light, permanent resident aliens. Uh, it's a U S a permanent resident has the, the quote unquote green card, non permanent resident aliens. This is a very important point to note because the non permanent resident alien, which is a borrower living here in the United States. Uh, and in this case for this particular status, deriving their income in the United States. With a work authorization document allowing them to work in the United States and with U. S. credit and obviously claiming their income, in this case 1090 through 1099, that non permanent resident alien category borrower is eligible for most of the same loan products. That a permanent resident alien, a U S and a U S citizen is, there would be in that same, uh, category and get the same rates and the same pricing. They're not going to be an ITIN. The ITIN borrower, you have to put non permanent resident alien in the pricing engines to pull up the ITIN borrower, but they are not a non permanent resident alien because they do not have a work in that category because they do not have the work authorization. Document. They do not have any type of legal status here in the U. S. Where's a non permanent resident alien does have legal status here in the U. S. To either some type of visa that allows them to be here to work or some other type of immigration status or maybe an H one B one visa. You know, different types of of immigration statuses that will allow them to be here legally versus the item borrower. That is, uh, not, does not have legal status, but is working here in the United States, deriving their income from the U S does have us, uh, base credit and does have an itin document. They got to have the itin, which is the individual taxpayer identification number, which is what allows them to receive the 10 99 and pay, uh, file their income tax returns. And we'll shoot, you know, if, if applicable. So, but the ITIN borrower then would be a separate ITIN category. So when you are structuring your loan for the ITIN borrower for 1099, make sure that you selected the ITIN option for that 1099 loan because it's going to have different pricing, different parameters, different guidelines. And last but not least, in this section here, foreign nationals are not eligible because Uh, the 1099, uh, loan product is based on the borrower receiving a 1099 document for income generated in the USA. So that's really important to note. Therefore, national borrowers are not eligible. And last year, we're going to cover. Uh, the income requirements. So now you've vetted the deal up to here. You realize that full dock in the traditional sense doesn't work for your borrower that received 1099s. You vetted their, their, uh, credit, the property type LTV assets. But now we're breaking down the income requirements. So do remember always 90 percent of the income is applicable of the gross income stated on the 1099 form, only a 10 percent expense factor, which blows a bank statements away. A business narrative is going to be required, and that's going to depend on the loan option selected. Uh, each investor is going to have. Uh, their own business narrative form, uh, but it is going to be required because they want to see the structure of the business to make sure that it actually is, uh, self employment, uh, now, please note. that all of these guidelines for the different loan options are specific to that option. So, you cannot generalize any of these components. These are here, um, these are different requirements you're going to run into, but like for this third bullet point, why state may require the borrower to receive the 1099 from only one company, that's because In the majority of the guidelines, that's what it states. A borrower has to receive the 1099 from one company. Some of them may state that they have to be with that company for two years. So you got to really review the guidelines. You cannot generalize any of these points when you're structuring your deal. Uh, so what is going to be a, uh, pretty much across the board requirement, minimum requirement is that you have to have a 1099 for, for the most recent complete year. 12 months is usually required. The only exception to this would be, for example, the doctor loan that I just mentioned, where the doctor transitioned from W 2 employee to 1099 employee in June of 2023, right? So the doctor is, did receive a 1099 in 2023, but it was only for six months. Of work, uh, as self employed. So he had a six month, 10 99, a six month W2. And then we had the year to date earnings of 2024. And that's how we completed the 12 months of verification, uh, of employment type forms sent to the company that was contracting him. We got year to date. We had pay stubs. We also looked at bank deposits and that completed the puzzle for the 12 months of income, even though we didn't have a 10 99 for 12 months. So do know that there are workarounds for these scenarios. Uh, now the income is validated with a wage and income transcript from the IRS. A W 2 and 1099 transcript only. Please do not provide the record of account transcript. Please do not provide the tax return transcript because that's what we're trying to avoid here. And going this alt doc route is not presenting tax returns that have all of the, uh, Business expense or personal expense write offs for the borrower that then at that point of view, provide that document and how they're going to use that document to calculate the income. And now your bar is not going to qualify. That's the same as providing tax returns with a 10 99 only that's it. So make sure that the tax transcript that is provided is the wage and income transcript only for whatever year that you're being required. Maybe it's one or maybe it's two. Uh, please note that. Uh, this option may require confirmation from the employer that no job related expenses are incurred by the borrower. Simple letter from the employer should underwriting ask for it. And most importantly, last but not least, please note that independent. Third party verification is required of the current income. Now I just noted how my doctor's loan there, we used multiple documentation since we didn't, you know, we were trying to Prove multiple things with that action, uh, the year to date, as well as complete our 12 months, which is why we had to provide, you know, uh, the, the, the pay stub that he received, uh, or pay, I guess, statements, because really not pay stubs, they didn't have any deductions, just a statement of what he got the bank statements and a verification of employment from the employer. You may be asked to prove that, you know, you have to prove the year to date income for the borrower. It's not going to usually be with a profit and loss. It's usually what they're going to require is either pay stubs that show the year to date income because, you know, they're not getting paid cash. They're getting paid with some type of check or a written verification of employment from the company contracting them for the services or a letter from their CPA. Okay. Or in some cases, they'll even accept year to date bank deposits. So you really got to look at the guidelines and I'm going to share a couple of guidelines with you in the end of this presentation, just so you can compare the differences and put into context what we're discussing here. But do pay attention to how the income is calculated pretty easy. 90%. You just got to make sure that all the other boxes are checked as well. To document and verify the income. So, uh, here we have two sample guidelines. This one up here is one guideline, and this is another guideline. And that's, that's the full section of for 1099 loans for each one. It's, it's, it's. It's very easy, right? Um, they're talking about, uh, you know, one year 1099 provided from single employer for one year validated with the wage and income transcript. Year to date earnings are required to 10 percent expense factor. Uh, and they're only telling you, you need tax returns. If you can't really provide any of these documents here, they're going to ask you for tax returns. And they talk a little bit here about seasonality and notice. how they have the box in red that talks about, um, you don't need a full one year period 1099 when the borrower changes from being paid W 2s to 1099 while working for the same employer in the same position. So that's how we got our doctor approved. So that's one option. Now look at the option below. It's even a little simpler, right? Uh, we're talking about qualifying income is determined by reviewing the 1099s. And the year to date bank statement deposits, the 1099 income and year to date bank statement deposits will be multiplied by 90 percent profit margin to determine the net income. And notice how here they're talking about if the net income from the year to date bank statements is less than, you know, but the income is stabilized. In other words, it's not declining. Then they're going to use the lower option now, but they're also telling you the net income from the year to date bank statements is greater than they're going to use the bank statements. Right. And average of the bank statement income and the 1099 income. So they do give you an opportunity to bump up the income if the business's activity is increasing. So these are two separate ones, but this second one here, which happened to be the one of the, which we closed the doctor loan. This guideline is a little simpler than the one on top and simpler than most, but notice the point here, only one 1099 may be utilized. And issued to the borrower for a service provided for the same company for two full years. So, do note, uh, the small print, like we like to say there. And in our last slide here, just sharing you the 1099 of our favorite borrower, the infamous Mr. John Homeowner, who works for, uh, or doesn't work for, he is an independent contractor, uh, Wonderful place, right? And he got, he received his, uh, 1099 for non employee compensation for 124, 500 and 87 cents. So Mr. John homeowner's income there, if we were to apply the simple income calculation here, right? There's no income calculating document here is simply. Get that gross amount times 0. 9 and we can credit Mr. John homeowner for an annual income of 112, 050 and 78 cents. And if we divide that by 12. We're looking at 9, 337. 56 monthly income for Mr. John Homer. How quick was that for an income analysis for your self employed borrower, right? So keep in mind these 1099 loans when your borrower actually receives a 1099. And remember what I mentioned at the beginning of the presentation, do not assume that just because they receive a 1099, that is not a traditional full doc borrower. You first have to Complete the income analysis using the tax returns, uh, as may be applicable. And then if you see that the numbers don't add up going traditional full doc, then obviously we transitioned to the 90 percent LTV max, uh, 1099 all top loans. So wishing you all lots of success in structuring your 1099 deals and looking forward to some of these coming by the life support room for structure. And you letting me know that, uh, this presentation is what, uh, basically brought it to mind for you to structure your deal with the 1099. All right. Great. Thank you, Jose. I don't see any questions. Absolutely amazing program there, but no questions came in. So we'll go ahead and wrap it up. Remember that we do this training every Tuesday, Wednesday, and Thursday at 12 p. m. Eastern with a new Loan Officer Training topic. So we will see you all tomorrow, 12 p. m. Eastern for the next episode of the Loan Officer Training Series with the Mortgage Calculator. Have a great day, everyone.