Unconventional mortgage loans: Help for 1099 clients and investors

A major challenge for both self-employed buyers and those who are investors is qualifying for a mortgage. Whether you’re just starting out as a first-time buyer, investor, or even if you’re an experienced pro, the five unique programs outlined below will not only get the job done — you can also use them as a powerful way to generate more buyer and seller leads for your business. 

A sponsored article on Inman recently discussed several types of loans best suited to various types of buyers: jumbo loans for the luxury buyer, FHA for first-time buyers, and cash-out refinances for first-time investors. Today’s column does a deep dive into five other unique ways those who are self-employed, receive 1099 income, or are investing in single-family residences can use to qualify for a mortgage. 

I recently interviewed Emily Tolbert, the manager and lead loan originator for Motto Mortgage Signature Plus in Daytona Beach, Florida, about unique ways buyers can qualify for a loan, as well as how these programs work. 

Tolbert explained that these unique programs are designed for those who don’t qualify for traditional conventional mortgages but do have other sources of income. These alternative ways of qualifying this type of borrower allow them to become homeowners and investors, even when they have been turned down for a traditional mortgage in the past. 

Before discussing the various programs available, here are some key facts about these loan products:

• These programs are not available through traditional banks such as Bank of America or Wells Fargo. You must go through a mortgage broker to access them and not all mortgage brokers offer them. 
• Like traditional mortgages, there are two types of rate structures: fixed-rate (stays the same throughout the loan) and adjustable-rate mortgages (ARMs) where the interest rate changes based on the specific index to which the loan is tied. 
• Because these loans are often considered to be riskier than traditional mortgages, interest rates may be higher. They may also require a 20 percent to 25 percent down payment. 
• The approval process may be more complex and time-consuming, requiring detailed documentation of the borrower’s assets and/or other income the borrower is using to qualify.  

Here’s the list of these unique programs that can help homebuyers who lack traditional W-2 income achieve their homeownership and/or real estate investment goals. 

Types of programs

Asset-based mortgages

An asset-based mortgage, also known as an asset-depletion mortgage or asset-dissipation loan, is a type of loan that considers a borrower’s assets as the basis for qualification, rather than their income. This type of mortgage is typically used by retirees or high-net-worth individuals who have significant assets but may not have a traditional income stream.

Buyers qualify based on their liquid, semi-liquid and other investment assets. This can include savings accounts, stocks, bonds, retirement accounts and other types of investments. 

The bank statement loan program

Tolbert says this is her favorite loan program and the one she uses the most often. The bank statement loan program is available for self-employed borrowers. To qualify, you must have at least two years of being self-employed. There are two programs: The 12-month bank statement loan program and the 24-month loan statement program. 

In terms of qualifying, rather than having your income calculated based upon your tax returns, your income is calculated based upon the cash flow documented on your bank statements. This can include both your personal and business accounts. Most self-employed borrowers will show much more income flowing through their bank accounts as opposed to what they report to the IRS. Tolbert shared an example that illustrates how this type of program works.  

Tolbert’s client provided her with tax returns that showed $4,000 per month in income. The issue was that this wasn’t enough to get him into the type of properties he wanted to purchase.  

Tolbert suggested that he use the 24-month bank statement loan program. This program allowed him to use a combination of both his personal and business statements to calculate his cash flow and net income, which turned out to be $12,000 per month. Once they were able to document the bank statements, he was able to close in less than 30 days on a property he really wanted. 

Programs for those with 1099 income

This program is golden for those of us in the real estate business and for anyone else who is self-employed or receives 1099 income. 

Instead of using your Schedule C, LLC, or S-Corp tax return to document your income (and this has been a nightmare for those of us who have dealt with it both for ourselves and our clients), you can use your 1099. 

If possible, Tolbert recommends using this program during the first three months of the year. The reason? Once you reach the second quarter and through the end of the year, you must supply a detailed quarterly Profit and Loss Statement (P&L). During the first quarter, you don’t have to supply a P&L. 

Using 1099 programs to generate leads

Tolbert says great thing about these programs is those who are self-employed and/or receive 1099 income actually have three different programs they can choose from—the traditional conforming loan, the Bank Statement Loan Program, or the 1099 program. She recommends comparing the rates and costs of each loan and then choosing the one best suited for the borrower’s unique situation. 

Use these programs to generate a whole new source of both buyers and listings

Tolbert suggests that realtors help other 1099 income/self-employed individuals. Think about all the people you know who receive this type of income—financial planners, insurance agents, handymen, home cleaners, decorators, stagers, ride-share drivers, and most business owners. They may not realize that they can qualify for one of these mortgages that will allow them to purchase a home as their primary residence or as an investment. 

More importantly, keep in mind that NAR’s most recent Profile of Home Buyers and Sellers shows that 58 percent of all buyers were living in a property they owned at the time they made their next home purchase. These loan products can be a great source of listings, not just buyer leads. 

Debt Service Coverage Ratio programs (DSCR)

Most multi-family investors know that if they’re purchasing 1-4 units, they can qualify for FHA and other types of conventional financing. Once you reach five units or more, however, the property must qualify to cover the debt service and expenses rather than the owner. Tolbert explains:

The unique thing about a DSCR loan is you do not bring your personal income to the file—you are using the income from the property. So, what occurs is that there’s a special type of appraisal done where they do a rental analysis in the area. 

To give a simplified example, if a rental property in the area could generate an income of $2,500 a month, and your property could generate that amount or greater, then you move forward with the loan. You are bringing assets to the loan, but you’re not bringing income. (What this does is that) it allows you to really begin an investment portfolio or continue with your current investment portfolio without having to show that personal income.

Clearly, if you were relying on your income to qualify, that would severely limit your ability to build an investment portfolio. 

The delayed financing program

On February 1, 2023, Fannie Mae updated its eligibility policy for cash-out refinance transactions. As of April 1, 2023, any existing first mortgage paid off through the transaction must be at least 12 months old as measured from the note date of the existing loan to the note date of the new loan. 

According to Tolbert, 

The other thing that happened effective April 1, 2023, is that you if you purchase a home and you’re not doing delayed financing, you have to wait an entire year to do your cash out refinance. 

This can be a serious challenge for builders, flippers, house hackers, remodelers, or anyone else who pays all cash and then intends to obtain financing before the one-year period is up. 

The delayed financing program is ideal for this situation. Here’s how the program works: 

[This program lets you] present an all-cash offer with a quick close. Let’s say that you would really like to get some or all of that money back out in order to invest it elsewhere. So, if you close on Monday, on Tuesday you could begin your Delayed Financing Loan Program. You must close the loan no later than six months from the closing date. In other words, you don’t have to wait a full year to get your money back. 

In terms of the rates and fees, you will qualify just like you would for any other regular conforming conventional home loan program. The rates are not any higher than the rates you would receive if you were doing a regular home loan purchase. 

Understanding the various types of alternative financing available is crucial. For those with non-traditional income, these unique loan programs allow more individuals to realize their dreams of homeownership and/or property investment. For agents, sharing these programs with those who would not normally qualify for a traditional conventional loan can be a huge lead generator for their business for many years to come.