June 25, 2024 • 31 mins
Welcome to "Loan Officer Training," the podcast that equips mortgage professionals with the knowledge and skills to excel in the lending industry. In this episode, titled "How to Structure 1099 Borrower Loans," we focus on the unique challenges and opportunities of working with self-employed borrowers.
Learn the best practices for structuring loans for 1099 borrowers, including how to accurately assess income, navigate documentation requirements, and choose the right loan products. Our expert guests will share their insights on evaluating financial stability without traditional W-2 forms, and tips on effectively communicating with self-employed clients.
Whether you're an experienced loan officer or new to the field, this episode will provide you with valuable strategies to successfully secure loans for 1099 borrowers. Tune in and gain the expertise you need to help your self-employed clients achieve their homeownership dreams.
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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
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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 thousands of Non-QM mortgage loan program variations 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 licensed Mortgage Loan Originators can assist our customers with Conventional, FHA, VA and USD
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Restream recording Jun 25, (00:00):
All right.
So welcome everyone.
My name
is Kyle Hiersche I'm the COO
Restream recording Jun 25, 2 (00:03):
of the mortgage calculator joined
here by our sales manager JoseGonzalez And we are lender that
specializes in non qm loans andwhat we do every Tuesday
Wednesday Thursday evening at 7p.
m Eastern on this show is gothrough a deep dive into a loan
officer training topic tonightWe're going to be talking about
how to structure a 1099 borrowerloan something.
We're very familiar with here Atthe mortgage calculator, because
(00:26):
we do specialize in non loan.
So, with that being said, I willgo ahead and turn it over to
Jose to take us through.
His presentation.
(00:49):
Good evening, everybody.
Thank you for joining us fortonight's presentation on 1099
borrower.
So what exactly is a 1099?
What is a 1099 borrower?
Well, I'm not going to spill thebeans.
I'm, I'm not going to get aheadof myself here and, uh, Because
(01:09):
all of those explanations are inmy presentation.
So give me a second here and Iwill be ready to share.
Okay.
All right.
Sorry about that.
So let's jump right into ithere.
(01:31):
How to structure a 1099 borrowerloan.
So.
What is a 1099, right?
A 1099 is an IRS form that isissued to sole proprietors,
independent contractors,partnerships, and LLCs.
And here's the main point toconsider for non employee
(01:56):
compensation, right?
In other words, you can't be anemployee of a company and be
receiving 1099s, right?
1099s are self employedborrowers owned.
A 1099 loan is a greatalternative option instead of
(02:18):
bank statement loans and I'llget that, uh, get into that in a
minute when I go over, uh, someof our sample guidelines that I
have.
Now, one thing to note, For 10.
99.
Now, you know, for self employedborrowers.
We always state that we need twoyears self employment in some
cases, you know, to verify thatthey've been in business for two
(02:40):
years.
However, uh, with our 1099options, we have options that
are possible with less than twoyears of self employment.
How is this so?
Well, you could have a 1099borrower that previously worked
for that same company as a W 2employee.
(03:02):
But it's now working for them asan independent contractor.
Or you could have a 1099borrower that previously
performed the same job duties asa W 2 employee but is now doing
it as an independent contractor.
Now it can be for the samecompany or it can be for another
(03:24):
company.
But the main note here is thatthey're doing the same job
duties.
For example, we have a loanright now where it's a doctor.
He was right.
You would never think aboutthat, but remember doctors are
licensed.
That's another, uh, keycomponent here that helps with
the 1099 loans.
You know, we have a doctor thatwas previously W2 and now
(03:48):
switched over to 1099 and heactually happened to switch over
mid year.
So.
Keep that in your train ofthought.
And when I get to talking aboutthe guidelines, I'll let you
know how we were able to putthat one together.
Yes, you can have somebodyactually less than 12 months and
can do the 1099 loan.
(04:16):
So, who qualifies for a 1099loan?
Well, I already made a mention,we're talking about self
employed borrowers only.
1099 loans are perfect forRealtors, right?
All Realtors get 1099s.
Uh, U.
S.
citizens, permanent residentaliens, non permanent resident
(04:39):
aliens with U.
S.
based credit and U.
S.
based income.
Now you will note foreignnationals are not allowed under
a 1099 program because 1099s arebased on income generated in the
U.
S.
A.
If you receive a 1099 you hadincome from work that you did.
(05:04):
in the United States and aforeign national by definition
is, you know, somebody is acitizen of another country who's
deriving their income fromanother country, not from the U.
S.
They would, unless they havelegal work authorization in the
U.
(05:24):
S., the foreign national wouldnot be able to qualify under
1099 and if that foreignnational did have work
authorization in the U.
S., guess what?
They would be a non permanentresident alien and then they
would also need U.
S.
based credit as well as the U.
S.
based income.
Uh, please note that entityvesting is allowed on investment
(05:48):
properties for 1099 loans.
Uh, we'll be talking aboutcommon entities like LLCs.
C Corp, S Corp, a partnership,limited partnership, uh, to name
the more common forms of entityownership.
Please also note that, um, 1099loans are eligible for primary,
(06:11):
second home, or investmentproperties.
Talking about properties, whatwould be our eligible properties
and LTV?
Well, um, 1099 loans are alldone under the non QM loan
(06:33):
category, right?
Uh, you would be looking atsingle family homes up to 90
percent max LTV.
A PUD, which is a single familyhome in, uh, with a homeowner's
association.
It could be a townhouse or itcould be.
And a detached single familyhomes, but PUD means that
(06:56):
there's a homeowner'sassociation.
We can, uh, ten and nine loansare eligible for warrantable
condos up to 90 percent max LTV,two unit properties also up to
90 percent LTV, three to fourunit properties up to 85 percent
LTV.
(07:16):
Please note that modular homesare considered.
As long as they're not unique.
Now, what is a modular home?
A modular home is not amanufactured home.
A modular home is a home wherethe pieces are, are built in the
factory and then thoseindividual pieces are
(07:36):
transported.
It could be pre wired, preplumbing, all that kind of good
stuff.
And then those individual piecesare transported to the job site
and they are assembled on thejob site.
But it is not a manufacturedhome.
Non warrantable condos up to 85percent LTV.
(07:58):
And we can even loan on ruralproperties up to 20 acres and up
to 80 percent LTV for our 1099options.
Now, what are some of the creditand asset requirements for the
1099 loan?
(08:19):
Well, we can actually go as lowas 600 on the credit score at an
80 percent LTV with at least twotrade line reporting in the past
24 months or three trade linesin the past 12 months.
Please note that the bestoptions for non QM are always
going to be at a 660 or abovecredit score and preferably
(08:44):
three trade lines reporting for12 months or two trade lines for
12 months.
24 months with activity in thepast 12 months.
As always, asset verificationnot required on cash out refis.
For our 600 plus credit scoreoption, uh, we do need 48 months
(09:05):
seasoning on credit events, uh,with 20, excuse me.
It's 24 months seasoning for the600 or plus credit score option,
but 48 months seasoning andcredit events for the best case
option.
That would be like in some ofour investors going between the
super prime and the primeoption, right?
A, B, C, D.
(09:26):
Uh, now.
Zero times 30.
And this is on the mortgage,right?
For the last 24 months is goingto give you the best options,
but we actually do have for aone times one 20 in the past 12
months or a C grade, we actuallyhave 70 percent LTV.
(09:49):
Now I'm obviously not giving youevery particular configuration
here.
What I'm doing is.
Uh, telling you that you got tohave an open mind because
there's a lot of differentoptions out there if you, uh,
vary the LTV and now the reserverequirement is really going to
vary depending on the investor,right?
(10:10):
But it can be anywhere from sixmonths for the best case select
option down to no reserves atthe lower LTV and credit rates.
So typically as they lower theLTV, they're going to get a
little bit more lenient on thereserves.
So, let's go over here now, uh,sample guideline here so that we
(10:35):
can break it down now because Idid touch on some points here.
But I want to break them downline by line.
So notice here, uh, payments tosole proprietors or contract
individuals are reported on IRSform 1099.
I already went over that, right?
And included in the borrowerschedule C.
(10:58):
Now, this is really important tonote that, you know, The 1099
borrower hopefully will have aSchedule C because if they're
anything other, if they'reincorporated or anything like
that, uh, it's not going to gounder Schedule C.
Now, you do not have to turn intax returns for this program.
(11:20):
Keep that in mind.
As long as for this particularguidelines, you provide 1099s
for the most recent one year.
And in this particular option.
It says 1099s are from the samesingle employer for the past one
year.
(11:41):
They're also telling you 1099sare validated with a wage and
income transcript from the IRS.
So, And actually, let me giveyou the last bullet points, and
then I'm going to expand alittle bit on, you know, this is
not cookie cutter here, right?
Year, now, year to date earningsfor the 1099 option need to be
(12:04):
verified, and they can beverified by either a year to
date pay stub.
Now, keep in mind, the pay stubis not going to have deductions,
right?
There aren't going to be anypayroll deductions because this
borrower is self employed.
They're not an employee.
They'll be responsible for theirown payroll, uh, expense when
(12:25):
they file their tax return.
So the year to date earnings canbe verified by either a year to
date pay stub, a written VOEfrom the 1099 provider, I'm not
going to call them theiremployer because they're not an
employee.
I guess I could call them theircontractor.
The borrower is the independentcontractor and they are
contracting.
(12:47):
Or other equivalent third partydocumentation.
Now what are we talking aboutthere when we talk about or
other equivalent third partydocumentation?
Well, uh, most of the time youprobably will not have a 1099
borrower with a year to date paystub.
(13:09):
And if they have more than oneemployer, you may have an issue
with the written VOE.
But other, uh, third partydocumentation could be, for
example, from an accountant,from a CPA.
Uh, if that, uh, employer or,you know, the company that's
contracting them cannot providea written VOE, maybe they have
(13:31):
an accounting staff.
Or a CPA that can provide aletter on the CPA letterhead
stating the year to dateearnings that have been paid out
to that borrower.
Now, the one thing to note, andI guess this probably could have
been the Number one bullet, but,but remember here, they're,
(13:54):
they're stating in thisparticular guidelines, these
five bullet points are thebullet points that you would
have to meet so that you do nothave to provide the tax return.
That's the whole point here,right?
Tax return is probably going tohave a lot of unreimbursed
business expenses.
that will knock down our grossincome.
(14:15):
So in the last bullet pointstates here, all gross receipts
will have an expense ratio of 10percent applied to them.
What that means is that you canget that 1099 document and
whatever is the gross amount,multiply it times 90 percent and
that's the borrower's incomereally, really easy.
(14:38):
So let's assume that we'retalking about 100, 000 In a
1099.
Well, then that's a really easythought, right?
You don't have to go through 12months of bank statements.
You don't have to worry about,uh, declining income trends.
You don't have to worry about,uh, large deposits that can't be
sourced or documented.
(14:58):
I mean, you're just looking atthe gross amount of the 1099
times 0.
9.
So in this case, our 1099borrower, they got issued a 1099
for 100, 000 would have anincome of 90, 000.
10, 000.
Now it's uh, this is why I wasstating that it's a great
(15:20):
program for realtors andactually a great program for
anybody that receives a 1099because a 1099 loan will be much
cleaner and much cleaner filethan a bank statement loan with
many less obstacles to overcome.
For example, what are the someof the obstacles?
(15:41):
that you could be facing with abank statement loan, right?
And we touched on them a coupleof minutes ago.
The first one is decliningdeposits, right?
Uh, if you have decliningdeposits, that, that's a real,
uh, big red flag that couldcause a loan to be denied.
If you have, uh, large depositsthat can't be verified as
(16:06):
income, Then you're going tohave other issues as well.
If you have too many NSFs oroverdrafts, and in most cases
having more than two or three inthe last 12 months is going to
disqualify the loan.
So those are some issues therethat could affect you.
(16:27):
Another issue with the bankstatement is you haven't been in
business.
For 12, you know, for, for the,for the amount of time,
typically for the bank statementloans, they're going to want two
years.
They may make the exception inone year under the same, uh,
pretense, you know, you weredoing the same job duty as a
(16:48):
licensed, uh, employee, like anelectrician, for example, and
now you transition to being a 1099 and electrician, well, that's
one way to do it.
Uh, but again, that's an issuethat you're going to have.
Where the 1099 is going to be alot easier.
I had made a mention to you allto hold on to the thought about
(17:12):
the one loan that we'recurrently doing with a doctor,
right?
Great income, but halfwaythrough 2023, the doctor
transitioned from W2 to 1099,right?
So we actually have, uh, forhalf of the year, we have a W2
(17:32):
for 2023.
And for the other half of theyear, we have a 1099.
And then, uh, we have about sixmonths worth of, um, income now
via a 1099 that we were able todocument with a year to date
letter from the employer.
So in that type of a scenario,since it's with the same company
(17:56):
that previously hired him as anemployee, and now they're hiring
him as an independentcontractor, and he had the W 2
and the 1099, From the previousyear, he did receive a 1099.
So we just added up the W 2income and the 90 percent of the
1099 income to equal his 2023income, and now we are further
(18:21):
documenting that with the yearto date, 2024 income.
So in that case, that's a greatloan that was able to be put
together.
Due to the fact that we weredoing this as a 1099 loan.
So notice what it says there.
If the borrower does not meetthe requirements above tax
(18:45):
returns for the most recent oneyear, IRS 1040s are required to
determine income and relatedexpenses.
Now, one thing to note also is,um, How the, how the file will
be, um, quality control, uh,tested is going to, you will be
(19:08):
asked, uh, to provide, uh, wageand income transcripts, which is
basically a W 2 and 1099transcripts.
They call it wage and incometranscript as opposed to the
record of account.
Transcript, which is thetranscript that, uh, is all
inclusive and says, you know,what you reported in net income
(19:31):
and what your tax liability wasall those additional details,
whereas the wage, uh,transcript, which is for W two
and 10, the names only will onlylist.
All the 1099s that you may havereceived in that calendar year,
as well as all the W 2s that youmay have received in that
calendar year.
(19:52):
It will not talk about your taxliability nor, nor anything like
that.
And they will use it to justreconcile the amount listed on
the 1099 document that wasprovided and make sure that it
matches the W 2.
The 1099 that is in the IRSrecords to make sure that the
(20:13):
documents were not altered.
So that's really important.
Now, if the wage and incometranscript for whatever reason
is not available, cannot belocated, then you're fine.
Then you will probably have toprovide tax returns.
Anyhow, and figure out analternative method to verify the
income.
(20:34):
Notice it says here also on theguidelines if the borrower is a
seasonal 1099 employee.
Now, look at this one closely.
Unemployment income compensationmay also be used in
qualification provided it can bedocumented with a two year
history.
On form 1099 and comments fromthe borrower's employer that the
(20:56):
unemployment compensation islikely to continue as received.
Uh, you do get, uh, 1099s forunemployment compensation as
well.
And notice it, it says here, theunemployment compensation must
be confirmed on the 1099transcripts, which was what I
was telling you, the wage andincome transfers.
(21:18):
transcript.
Now notice the note in thebottom, right?
And they got the nice red boxaround it and all that stuff,
which I had already made thepoint, is 1099 forms covering a
full one year period are notrequired when a borrower changes
from being paid W 2s to 1099swhile working for the same
(21:41):
employer in the same position.
Now, that's a pretty cool, uh,guideline, uh, detail there.
But I will note that theseguidelines are for, you know,
for 1099.
As you know, as well as allother, um, income types, they're
(22:01):
not homogeneous.
And what I mean by that isthey're going to change from
option to option.
In other words, from investor toinvestor are the investors in
this case I'm referring to arethe investors who we sell the
loans to.
So we have to review all theguidelines and make sure
whoever's buying the loan, uh,you know, that we abide by their
guidelines so that they will buythe loan, right?
(22:24):
Simple as that.
So with that being said, we haveso many different companies that
we sell loans to.
That's why we have so manydifferent guidelines.
And we basically pick and choosethe best one that meets the
needs.
of the borrowers.
So in, in this case here, it'sstating 1099s for the most
recent one year provided and1099s are from the same single
(22:45):
employer for the past one year.
But there are other guidelinesout there that do not have that
requirement of 1099s are fromthe same single employer for the
past year.
You could have multiple 1099s,right?
Depending what you, you know,most people that 1099 don't have
multiple.
(23:06):
1099s are usually going to belike the realtor or the doctor
that's working, uh, as a 1099employee, you know, independent
contractor.
So you're, you're going to beable to, to meet the guideline
requirement in that case.
But again, that is not arequirement that's across the
(23:29):
board, the same for everyone.
So, uh, Some important pointshere to consider would be that
basically the 90 percent point,uh, needing to verify the year
to date ending earnings and, uh,saying how long they've, you
know, if they've been with thatparticular, uh, program.
(23:52):
1099 provider.
I mean, I don't, you know, they,they refer to it as employer.
So we'll keep referring to it asemployer, but just keep in mind
that they are not employees,right?
They are independentcontractors.
And, and I did mention earlierthat due to the fact that this
is us based income, then, uh, wewould not have any foreign
(24:15):
nationals.
That would be applicable.
for 1099 loans.
So again, 1099 loans areprobably going to be the easiest
loan that you're going to do inthe non QM loans because it's,
it's not like the bank statementloan that you gotta put, you
know, 12 at 12 or be using 24months worth of bank statements
(24:37):
on an Excel spreadsheet.
Then you gotta look at theposits that you have to back out
because they're not incomerelated or because they're
transfers or credits or whateverit may be.
So, you know, it's your incomecan vary quite a bit on a bank
statement loan, depending onwho's reviewing the deposits.
Whereas the 1099 loan again isvery cut and dry.
(25:02):
Typically, it's going to be 90percent of the gross amount of
the 1099 is what will beconsidered as the income.
So definitely look to themortgage calculator for all your
1099 loans as well as all yourother alternative income loans.
Did mention bank statements, didmention, uh, profit and loss,
(25:24):
you know, and if I were to putit in a pecking order, I would
probably would put full dock asthe first, uh, option, then
1099, then bank statement.
Then profit and loss, then assetutilization.
And then if it's an investmentproperty, DSER.
All right.
(25:49):
Thank you, Jose.
Great presentation there.
Um, let's see here.
Some questions question is, isit possible bank statement
scenario better than 1099?
Well, I think I just explainedthat usually it's the other way
around.
Now, I guess what I'm talkingabout is in terms of, uh, the
(26:10):
simplicity of the transaction.
Right.
That's, that's what I'm talkingabout.
A cleaner file.
Um, interest rate wise, they'reall very similar.
Now you may have in some caseswhere you could find a better
option for a bank statement, youknow, interest rate wise, maybe
a less expensive option for abank statement loan than a 10 99
(26:31):
loan.
I'm not going to say therearen't going to be cases of
that, but, but usually They'rethe same, you know, I mean
they're very similar rates.
There isn't like a bigdiscrepancy where you're going
to find a little bit of a moredifference is when you're
comparing 1099 or bankstatements to profit and loss
because profit and loss loanshave a little bit less liquidity
(26:52):
and secondary.
So it's just going to be alittle bit more expensive.
All right, let's see here.
Is this exclusive for non QNloans?
So I guess it'd be a good timeto just touch on officially what
is.
What makes a loan non QM, Jose?
What is a non QM?
Well, uh, not, I mean, we haveagency loans, right?
(27:15):
Which are conventional loans, orFHA loans, um, USDA and VA,
right?
Those are all full doc, thoseare all, uh, sold into the
secondary market via, to, to thedifferent agencies, uh, the
GSEs, uh, Fannie Mae, FreddieMac, right?
(27:36):
And Ginnie Mae, which is thebuyer of the government, right?
The USDA and the VA, excuse me,just the FHA loans, VA, they go
to Ginnie Mae.
So those are agencies, those arethe ones that we consider more
the QM loans.
The non QM are the loans thatdon't sell through the agency,
(27:56):
uh, portals to the Fannie orFreddie.
They, they're independent, uh,individual guidelines.
Uh, the loans are sold toinvestors, you know, usually,
you know, Wall Street investors,hedge funds, insurance, uh,
companies that buy up these, uh,loan portfolios.
To generate income, right?
(28:18):
So they're, they're, they're notyour agency loans, uh, which is
typically what's going to makethem non QM more than anything
else is going to be that.
Now there are some otherdifferences in the non QM loans,
right?
They're all manuallyunderwritten.
They, they, there's no automatedunderwriting ever for a non QM
loan.
(28:38):
And, and, and again, the, thefact of being non QM is what
gives us so much variety becausethey're not bound by the same
guidelines that everybody elsehas to be bound by.
So everybody that does FannieMae loans has to abide by the
Fannie Mae guidelines.
There may be overlays, which aresome additional restrictions
(29:00):
that the investor, buyer of theloans.
Um, investor may add, but theguidelines overall are going to
be the same.
Just, uh, additionalrestrictions added.
You can't loosen it up more thanit already is.
So that's a, that's anotherthing to consider between the QM
loans and the non QM and yes,the 1099 option is only for non
(29:28):
QM loans.
And here's a question 1099brokered loan.
Well, we would do our 1099 wherecorrespondent where we are.
Maybe there's some crazyguideline where you'd need to do
it brokered, but for the mostpart, we would be absolutely
we're going to have usually.
The best pricing on all of ourloan options when we're the
(29:50):
lender, we like Kyle mentioned,we use the broker channel for
those outlier programs that wemay not be able to have an
option for like a 575 creditscore and a DSCR purchase or
cash out.
That option we can only, uh,originate.
All right.
And it looks like probably thelast question here, are these
(30:12):
loan apps taken using a 10 Ohthree essentially?
Absolutely.
Yeah, this is not like a skinnyapp that you may find for some
of the business purpose loans.
Uh, this does use the standard10 Oh three.
Uh, we do use our, uh, in ourcase, uh, I mean, most of the,
all the lenders are, are goingto use Encompass.
(30:34):
Uh, for their loans and, and,uh, generate the ERLA, uh, via
Encompass, the 1003.
All right.
Well, great presentation there,Jose.
I don't see any more questions.
I think we'll go ahead and wrapit up.
Uh, remember we do this at 7 p.
m.
Eastern time, every Tuesday,Wednesday, and Thursday evening.
(30:54):
So we will see you all tomorrow,7 p.
m.
Eastern for the next episode ofthe Loan Officer Training Series
with the Mortgage Calculator.
All right.
So welcome everyone.
My name
is Kyle Hiersche I'm the COO
Restream recording Jun 25, 2 (00:03):
of the mortgage calculator joined
here by our sales manager JoseGonzalez And we are lender that
specializes in non qm loans andwhat we do every Tuesday
Wednesday Thursday evening at 7p.
m Eastern on this show is gothrough a deep dive into a loan
officer training topic tonightWe're going to be talking about
how to structure a 1099 borrowerloan something.
We're very familiar with here Atthe mortgage calculator, because
(00:26):
we do specialize in non loan.
So, with that being said, I willgo ahead and turn it over to
Jose to take us through.
His presentation.
(00:49):
Good evening, everybody.
Thank you for joining us fortonight's presentation on 1099
borrower.
So what exactly is a 1099?
What is a 1099 borrower?
Well, I'm not going to spill thebeans.
I'm, I'm not going to get aheadof myself here and, uh, Because
(01:09):
all of those explanations are inmy presentation.
So give me a second here and Iwill be ready to share.
Okay.
All right.
Sorry about that.
So let's jump right into ithere.
(01:31):
How to structure a 1099 borrowerloan.
So.
What is a 1099, right?
A 1099 is an IRS form that isissued to sole proprietors,
independent contractors,partnerships, and LLCs.
And here's the main point toconsider for non employee
(01:56):
compensation, right?
In other words, you can't be anemployee of a company and be
receiving 1099s, right?
1099s are self employedborrowers owned.
A 1099 loan is a greatalternative option instead of
(02:18):
bank statement loans and I'llget that, uh, get into that in a
minute when I go over, uh, someof our sample guidelines that I
have.
Now, one thing to note, For 10.
99.
Now, you know, for self employedborrowers.
We always state that we need twoyears self employment in some
cases, you know, to verify thatthey've been in business for two
(02:40):
years.
However, uh, with our 1099options, we have options that
are possible with less than twoyears of self employment.
How is this so?
Well, you could have a 1099borrower that previously worked
for that same company as a W 2employee.
(03:02):
But it's now working for them asan independent contractor.
Or you could have a 1099borrower that previously
performed the same job duties asa W 2 employee but is now doing
it as an independent contractor.
Now it can be for the samecompany or it can be for another
(03:24):
company.
But the main note here is thatthey're doing the same job
duties.
For example, we have a loanright now where it's a doctor.
He was right.
You would never think aboutthat, but remember doctors are
licensed.
That's another, uh, keycomponent here that helps with
the 1099 loans.
You know, we have a doctor thatwas previously W2 and now
(03:48):
switched over to 1099 and heactually happened to switch over
mid year.
So.
Keep that in your train ofthought.
And when I get to talking aboutthe guidelines, I'll let you
know how we were able to putthat one together.
Yes, you can have somebodyactually less than 12 months and
can do the 1099 loan.
(04:16):
So, who qualifies for a 1099loan?
Well, I already made a mention,we're talking about self
employed borrowers only.
1099 loans are perfect forRealtors, right?
All Realtors get 1099s.
Uh, U.
S.
citizens, permanent residentaliens, non permanent resident
(04:39):
aliens with U.
S.
based credit and U.
S.
based income.
Now you will note foreignnationals are not allowed under
a 1099 program because 1099s arebased on income generated in the
U.
S.
A.
If you receive a 1099 you hadincome from work that you did.
(05:04):
in the United States and aforeign national by definition
is, you know, somebody is acitizen of another country who's
deriving their income fromanother country, not from the U.
S.
They would, unless they havelegal work authorization in the
U.
(05:24):
S., the foreign national wouldnot be able to qualify under
1099 and if that foreignnational did have work
authorization in the U.
S., guess what?
They would be a non permanentresident alien and then they
would also need U.
S.
based credit as well as the U.
S.
based income.
Uh, please note that entityvesting is allowed on investment
(05:48):
properties for 1099 loans.
Uh, we'll be talking aboutcommon entities like LLCs.
C Corp, S Corp, a partnership,limited partnership, uh, to name
the more common forms of entityownership.
Please also note that, um, 1099loans are eligible for primary,
(06:11):
second home, or investmentproperties.
Talking about properties, whatwould be our eligible properties
and LTV?
Well, um, 1099 loans are alldone under the non QM loan
(06:33):
category, right?
Uh, you would be looking atsingle family homes up to 90
percent max LTV.
A PUD, which is a single familyhome in, uh, with a homeowner's
association.
It could be a townhouse or itcould be.
And a detached single familyhomes, but PUD means that
(06:56):
there's a homeowner'sassociation.
We can, uh, ten and nine loansare eligible for warrantable
condos up to 90 percent max LTV,two unit properties also up to
90 percent LTV, three to fourunit properties up to 85 percent
LTV.
(07:16):
Please note that modular homesare considered.
As long as they're not unique.
Now, what is a modular home?
A modular home is not amanufactured home.
A modular home is a home wherethe pieces are, are built in the
factory and then thoseindividual pieces are
(07:36):
transported.
It could be pre wired, preplumbing, all that kind of good
stuff.
And then those individual piecesare transported to the job site
and they are assembled on thejob site.
But it is not a manufacturedhome.
Non warrantable condos up to 85percent LTV.
(07:58):
And we can even loan on ruralproperties up to 20 acres and up
to 80 percent LTV for our 1099options.
Now, what are some of the creditand asset requirements for the
1099 loan?
(08:19):
Well, we can actually go as lowas 600 on the credit score at an
80 percent LTV with at least twotrade line reporting in the past
24 months or three trade linesin the past 12 months.
Please note that the bestoptions for non QM are always
going to be at a 660 or abovecredit score and preferably
(08:44):
three trade lines reporting for12 months or two trade lines for
12 months.
24 months with activity in thepast 12 months.
As always, asset verificationnot required on cash out refis.
For our 600 plus credit scoreoption, uh, we do need 48 months
(09:05):
seasoning on credit events, uh,with 20, excuse me.
It's 24 months seasoning for the600 or plus credit score option,
but 48 months seasoning andcredit events for the best case
option.
That would be like in some ofour investors going between the
super prime and the primeoption, right?
A, B, C, D.
(09:26):
Uh, now.
Zero times 30.
And this is on the mortgage,right?
For the last 24 months is goingto give you the best options,
but we actually do have for aone times one 20 in the past 12
months or a C grade, we actuallyhave 70 percent LTV.
(09:49):
Now I'm obviously not giving youevery particular configuration
here.
What I'm doing is.
Uh, telling you that you got tohave an open mind because
there's a lot of differentoptions out there if you, uh,
vary the LTV and now the reserverequirement is really going to
vary depending on the investor,right?
(10:10):
But it can be anywhere from sixmonths for the best case select
option down to no reserves atthe lower LTV and credit rates.
So typically as they lower theLTV, they're going to get a
little bit more lenient on thereserves.
So, let's go over here now, uh,sample guideline here so that we
(10:35):
can break it down now because Idid touch on some points here.
But I want to break them downline by line.
So notice here, uh, payments tosole proprietors or contract
individuals are reported on IRSform 1099.
I already went over that, right?
And included in the borrowerschedule C.
(10:58):
Now, this is really important tonote that, you know, The 1099
borrower hopefully will have aSchedule C because if they're
anything other, if they'reincorporated or anything like
that, uh, it's not going to gounder Schedule C.
Now, you do not have to turn intax returns for this program.
(11:20):
Keep that in mind.
As long as for this particularguidelines, you provide 1099s
for the most recent one year.
And in this particular option.
It says 1099s are from the samesingle employer for the past one
year.
(11:41):
They're also telling you 1099sare validated with a wage and
income transcript from the IRS.
So, And actually, let me giveyou the last bullet points, and
then I'm going to expand alittle bit on, you know, this is
not cookie cutter here, right?
Year, now, year to date earningsfor the 1099 option need to be
(12:04):
verified, and they can beverified by either a year to
date pay stub.
Now, keep in mind, the pay stubis not going to have deductions,
right?
There aren't going to be anypayroll deductions because this
borrower is self employed.
They're not an employee.
They'll be responsible for theirown payroll, uh, expense when
(12:25):
they file their tax return.
So the year to date earnings canbe verified by either a year to
date pay stub, a written VOEfrom the 1099 provider, I'm not
going to call them theiremployer because they're not an
employee.
I guess I could call them theircontractor.
The borrower is the independentcontractor and they are
contracting.
(12:47):
Or other equivalent third partydocumentation.
Now what are we talking aboutthere when we talk about or
other equivalent third partydocumentation?
Well, uh, most of the time youprobably will not have a 1099
borrower with a year to date paystub.
(13:09):
And if they have more than oneemployer, you may have an issue
with the written VOE.
But other, uh, third partydocumentation could be, for
example, from an accountant,from a CPA.
Uh, if that, uh, employer or,you know, the company that's
contracting them cannot providea written VOE, maybe they have
(13:31):
an accounting staff.
Or a CPA that can provide aletter on the CPA letterhead
stating the year to dateearnings that have been paid out
to that borrower.
Now, the one thing to note, andI guess this probably could have
been the Number one bullet, but,but remember here, they're,
(13:54):
they're stating in thisparticular guidelines, these
five bullet points are thebullet points that you would
have to meet so that you do nothave to provide the tax return.
That's the whole point here,right?
Tax return is probably going tohave a lot of unreimbursed
business expenses.
that will knock down our grossincome.
(14:15):
So in the last bullet pointstates here, all gross receipts
will have an expense ratio of 10percent applied to them.
What that means is that you canget that 1099 document and
whatever is the gross amount,multiply it times 90 percent and
that's the borrower's incomereally, really easy.
(14:38):
So let's assume that we'retalking about 100, 000 In a
1099.
Well, then that's a really easythought, right?
You don't have to go through 12months of bank statements.
You don't have to worry about,uh, declining income trends.
You don't have to worry about,uh, large deposits that can't be
sourced or documented.
(14:58):
I mean, you're just looking atthe gross amount of the 1099
times 0.
9.
So in this case, our 1099borrower, they got issued a 1099
for 100, 000 would have anincome of 90, 000.
10, 000.
Now it's uh, this is why I wasstating that it's a great
(15:20):
program for realtors andactually a great program for
anybody that receives a 1099because a 1099 loan will be much
cleaner and much cleaner filethan a bank statement loan with
many less obstacles to overcome.
For example, what are the someof the obstacles?
(15:41):
that you could be facing with abank statement loan, right?
And we touched on them a coupleof minutes ago.
The first one is decliningdeposits, right?
Uh, if you have decliningdeposits, that, that's a real,
uh, big red flag that couldcause a loan to be denied.
If you have, uh, large depositsthat can't be verified as
(16:06):
income, Then you're going tohave other issues as well.
If you have too many NSFs oroverdrafts, and in most cases
having more than two or three inthe last 12 months is going to
disqualify the loan.
So those are some issues therethat could affect you.
(16:27):
Another issue with the bankstatement is you haven't been in
business.
For 12, you know, for, for the,for the amount of time,
typically for the bank statementloans, they're going to want two
years.
They may make the exception inone year under the same, uh,
pretense, you know, you weredoing the same job duty as a
(16:48):
licensed, uh, employee, like anelectrician, for example, and
now you transition to being a 1099 and electrician, well, that's
one way to do it.
Uh, but again, that's an issuethat you're going to have.
Where the 1099 is going to be alot easier.
I had made a mention to you allto hold on to the thought about
(17:12):
the one loan that we'recurrently doing with a doctor,
right?
Great income, but halfwaythrough 2023, the doctor
transitioned from W2 to 1099,right?
So we actually have, uh, forhalf of the year, we have a W2
(17:32):
for 2023.
And for the other half of theyear, we have a 1099.
And then, uh, we have about sixmonths worth of, um, income now
via a 1099 that we were able todocument with a year to date
letter from the employer.
So in that type of a scenario,since it's with the same company
(17:56):
that previously hired him as anemployee, and now they're hiring
him as an independentcontractor, and he had the W 2
and the 1099, From the previousyear, he did receive a 1099.
So we just added up the W 2income and the 90 percent of the
1099 income to equal his 2023income, and now we are further
(18:21):
documenting that with the yearto date, 2024 income.
So in that case, that's a greatloan that was able to be put
together.
Due to the fact that we weredoing this as a 1099 loan.
So notice what it says there.
If the borrower does not meetthe requirements above tax
(18:45):
returns for the most recent oneyear, IRS 1040s are required to
determine income and relatedexpenses.
Now, one thing to note also is,um, How the, how the file will
be, um, quality control, uh,tested is going to, you will be
(19:08):
asked, uh, to provide, uh, wageand income transcripts, which is
basically a W 2 and 1099transcripts.
They call it wage and incometranscript as opposed to the
record of account.
Transcript, which is thetranscript that, uh, is all
inclusive and says, you know,what you reported in net income
(19:31):
and what your tax liability wasall those additional details,
whereas the wage, uh,transcript, which is for W two
and 10, the names only will onlylist.
All the 1099s that you may havereceived in that calendar year,
as well as all the W 2s that youmay have received in that
calendar year.
(19:52):
It will not talk about your taxliability nor, nor anything like
that.
And they will use it to justreconcile the amount listed on
the 1099 document that wasprovided and make sure that it
matches the W 2.
The 1099 that is in the IRSrecords to make sure that the
(20:13):
documents were not altered.
So that's really important.
Now, if the wage and incometranscript for whatever reason
is not available, cannot belocated, then you're fine.
Then you will probably have toprovide tax returns.
Anyhow, and figure out analternative method to verify the
income.
(20:34):
Notice it says here also on theguidelines if the borrower is a
seasonal 1099 employee.
Now, look at this one closely.
Unemployment income compensationmay also be used in
qualification provided it can bedocumented with a two year
history.
On form 1099 and comments fromthe borrower's employer that the
(20:56):
unemployment compensation islikely to continue as received.
Uh, you do get, uh, 1099s forunemployment compensation as
well.
And notice it, it says here, theunemployment compensation must
be confirmed on the 1099transcripts, which was what I
was telling you, the wage andincome transfers.
(21:18):
transcript.
Now notice the note in thebottom, right?
And they got the nice red boxaround it and all that stuff,
which I had already made thepoint, is 1099 forms covering a
full one year period are notrequired when a borrower changes
from being paid W 2s to 1099swhile working for the same
(21:41):
employer in the same position.
Now, that's a pretty cool, uh,guideline, uh, detail there.
But I will note that theseguidelines are for, you know,
for 1099.
As you know, as well as allother, um, income types, they're
(22:01):
not homogeneous.
And what I mean by that isthey're going to change from
option to option.
In other words, from investor toinvestor are the investors in
this case I'm referring to arethe investors who we sell the
loans to.
So we have to review all theguidelines and make sure
whoever's buying the loan, uh,you know, that we abide by their
guidelines so that they will buythe loan, right?
(22:24):
Simple as that.
So with that being said, we haveso many different companies that
we sell loans to.
That's why we have so manydifferent guidelines.
And we basically pick and choosethe best one that meets the
needs.
of the borrowers.
So in, in this case here, it'sstating 1099s for the most
recent one year provided and1099s are from the same single
(22:45):
employer for the past one year.
But there are other guidelinesout there that do not have that
requirement of 1099s are fromthe same single employer for the
past year.
You could have multiple 1099s,right?
Depending what you, you know,most people that 1099 don't have
multiple.
(23:06):
1099s are usually going to belike the realtor or the doctor
that's working, uh, as a 1099employee, you know, independent
contractor.
So you're, you're going to beable to, to meet the guideline
requirement in that case.
But again, that is not arequirement that's across the
(23:29):
board, the same for everyone.
So, uh, Some important pointshere to consider would be that
basically the 90 percent point,uh, needing to verify the year
to date ending earnings and, uh,saying how long they've, you
know, if they've been with thatparticular, uh, program.
(23:52):
1099 provider.
I mean, I don't, you know, they,they refer to it as employer.
So we'll keep referring to it asemployer, but just keep in mind
that they are not employees,right?
They are independentcontractors.
And, and I did mention earlierthat due to the fact that this
is us based income, then, uh, wewould not have any foreign
(24:15):
nationals.
That would be applicable.
for 1099 loans.
So again, 1099 loans areprobably going to be the easiest
loan that you're going to do inthe non QM loans because it's,
it's not like the bank statementloan that you gotta put, you
know, 12 at 12 or be using 24months worth of bank statements
(24:37):
on an Excel spreadsheet.
Then you gotta look at theposits that you have to back out
because they're not incomerelated or because they're
transfers or credits or whateverit may be.
So, you know, it's your incomecan vary quite a bit on a bank
statement loan, depending onwho's reviewing the deposits.
Whereas the 1099 loan again isvery cut and dry.
(25:02):
Typically, it's going to be 90percent of the gross amount of
the 1099 is what will beconsidered as the income.
So definitely look to themortgage calculator for all your
1099 loans as well as all yourother alternative income loans.
Did mention bank statements, didmention, uh, profit and loss,
(25:24):
you know, and if I were to putit in a pecking order, I would
probably would put full dock asthe first, uh, option, then
1099, then bank statement.
Then profit and loss, then assetutilization.
And then if it's an investmentproperty, DSER.
All right.
(25:49):
Thank you, Jose.
Great presentation there.
Um, let's see here.
Some questions question is, isit possible bank statement
scenario better than 1099?
Well, I think I just explainedthat usually it's the other way
around.
Now, I guess what I'm talkingabout is in terms of, uh, the
(26:10):
simplicity of the transaction.
Right.
That's, that's what I'm talkingabout.
A cleaner file.
Um, interest rate wise, they'reall very similar.
Now you may have in some caseswhere you could find a better
option for a bank statement, youknow, interest rate wise, maybe
a less expensive option for abank statement loan than a 10 99
(26:31):
loan.
I'm not going to say therearen't going to be cases of
that, but, but usually They'rethe same, you know, I mean
they're very similar rates.
There isn't like a bigdiscrepancy where you're going
to find a little bit of a moredifference is when you're
comparing 1099 or bankstatements to profit and loss
because profit and loss loanshave a little bit less liquidity
(26:52):
and secondary.
So it's just going to be alittle bit more expensive.
All right, let's see here.
Is this exclusive for non QNloans?
So I guess it'd be a good timeto just touch on officially what
is.
What makes a loan non QM, Jose?
What is a non QM?
Well, uh, not, I mean, we haveagency loans, right?
(27:15):
Which are conventional loans, orFHA loans, um, USDA and VA,
right?
Those are all full doc, thoseare all, uh, sold into the
secondary market via, to, to thedifferent agencies, uh, the
GSEs, uh, Fannie Mae, FreddieMac, right?
(27:36):
And Ginnie Mae, which is thebuyer of the government, right?
The USDA and the VA, excuse me,just the FHA loans, VA, they go
to Ginnie Mae.
So those are agencies, those arethe ones that we consider more
the QM loans.
The non QM are the loans thatdon't sell through the agency,
(27:56):
uh, portals to the Fannie orFreddie.
They, they're independent, uh,individual guidelines.
Uh, the loans are sold toinvestors, you know, usually,
you know, Wall Street investors,hedge funds, insurance, uh,
companies that buy up these, uh,loan portfolios.
To generate income, right?
(28:18):
So they're, they're, they're notyour agency loans, uh, which is
typically what's going to makethem non QM more than anything
else is going to be that.
Now there are some otherdifferences in the non QM loans,
right?
They're all manuallyunderwritten.
They, they, there's no automatedunderwriting ever for a non QM
loan.
(28:38):
And, and, and again, the, thefact of being non QM is what
gives us so much variety becausethey're not bound by the same
guidelines that everybody elsehas to be bound by.
So everybody that does FannieMae loans has to abide by the
Fannie Mae guidelines.
There may be overlays, which aresome additional restrictions
(29:00):
that the investor, buyer of theloans.
Um, investor may add, but theguidelines overall are going to
be the same.
Just, uh, additionalrestrictions added.
You can't loosen it up more thanit already is.
So that's a, that's anotherthing to consider between the QM
loans and the non QM and yes,the 1099 option is only for non
(29:28):
QM loans.
And here's a question 1099brokered loan.
Well, we would do our 1099 wherecorrespondent where we are.
Maybe there's some crazyguideline where you'd need to do
it brokered, but for the mostpart, we would be absolutely
we're going to have usually.
The best pricing on all of ourloan options when we're the
(29:50):
lender, we like Kyle mentioned,we use the broker channel for
those outlier programs that wemay not be able to have an
option for like a 575 creditscore and a DSCR purchase or
cash out.
That option we can only, uh,originate.
All right.
And it looks like probably thelast question here, are these
(30:12):
loan apps taken using a 10 Ohthree essentially?
Absolutely.
Yeah, this is not like a skinnyapp that you may find for some
of the business purpose loans.
Uh, this does use the standard10 Oh three.
Uh, we do use our, uh, in ourcase, uh, I mean, most of the,
all the lenders are, are goingto use Encompass.
(30:34):
Uh, for their loans and, and,uh, generate the ERLA, uh, via
Encompass, the 1003.
All right.
Well, great presentation there,Jose.
I don't see any more questions.
I think we'll go ahead and wrapit up.
Uh, remember we do this at 7 p.
m.
Eastern time, every Tuesday,Wednesday, and Thursday evening.
(30:54):
So we will see you all tomorrow,7 p.
m.
Eastern for the next episode ofthe Loan Officer Training Series
with the Mortgage Calculator.
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