“It’s really just that agencies have determined that tax returns are what they require,” said Tom Hutchens, senior vice president of sales and marketing for Angel Oak Mortgage Solutions. “There’s no gray area; it’s all based on the income on your tax returns. But we believe that doesn’t always paint the complete picture of someone’s ability to repay a mortgage. A lot of that is based on the tax code and what the IRS has determines that you can and can’t write off. A perfect example is an automobile. The IRS allows you, as a self-employed person, to write that off – and that cost comes out of your income. Well, if you’re a W-2 employee, you still probably have an automobile expense, but that doesn’t show up on your tax returns. The self-employed borrower is penalized by the tax code.”
Angel Oak’s solution to this Catch-22 is its bank statement program, which allows self-employed borrowers to prove their income using bank statements rather than tax returns. And while these borrowers are applying for non-agency loans, the program is a far cry from what most originators think of as “subprime.”
“Our self-employed borrowers in the bank statement programs average scores in the high 700s,” said Hutchens. “They’re not the typical subprime borrowers. But because they write everything off, they technically don’t have the income on their tax returns to qualify for a conventional program. But through bank statements, we’re able to analyze their actual personal cashflow. It’s just an alternative documentation. We still abide by ability to repay.”
Angel Oak’s bank statement program is aimed at self-employed borrowers with credit scores starting at 660. It offers up to 80% LTV, and loans up to $2 million. And it’s a real boon to self-employed borrowers, who’ve had a distinct lack of options since the financial meltdown.
“Really, the self-employed borrowers have been locked out of the market since the crash,” Hutchens said. “The only alternatives they’ve had have been the conventional guidelines – no private capital options. The option has been, you either qualify for a conventional agency loan or hard money
. To me, those couldn’t be further apart.”
And hard money loans aren’t always the best option, Hutchens said. For one thing, their higher interest rates will turn off a lot of borrowers.
“Certainly, first and foremost, it’s going to be interest rates – and just terms in general,” he said. “Most hard money loans are very short-term balloons. We offer 30-year fixed rates and 7-year ARMs that amortize over 30 years.
“It’s not only that – it’s also the safety of the loans,” he added. “With hard money loans, they do the bare minimum of underwriting. We go through and determine that the borrower is able to repay, that this loan will work for them and won’t put them in a worse place than they already were.
“It’s important to understand that their income is still documented – it’s just not traditional documentation,” Hutchens said. “They still have to document an ability to repay, they still have to have good credit history and an ability to manage their finances. We look at their current housing payment to ensure that they’ve had no problems with that, and that their new housing payment is in line with their cashflow – which we’ve documented over a two-year period. A lot goes into it to ensure that these are good loans, and the right loans for these borrowers.”
Self-employed borrowers can face a bit of a quandary when they’re searching for a mortgage. Traditional loans require proof of income through tax returns – but self-employed people typically write off a far greater amount in expenses than W-2 employees. And when they’re looking for a mortgage, that can leave the income reflected on their tax return coming up short.