Help getting a pre-approval with a 1099 job?
Jimmy LieuBusiness Member
Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes
Jimmy Lieu, Red 1 Realty4.9119 Reviews
Help getting a pre-approval with a 1099 job?
Most Popular Reply
Marc RiceBusiness Member
Real Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes@Jimmy Lieu
You’ll want to use a commercial lender if you don’t have 2 years as a 1099. The other option is find a partner who has a W2 or 2 years of a 1099 to get the conventional fannie Mae loans.
You could always buy in cash too and refinance with a commercial lender at 70-80% LTV as well.
I’d recommend checking out LimaOne, Aloha Capital, or Wildcat Hardmoney Lending for the commercial route.
Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews
28 Replies
- 5yMarc RiceBusiness MemberReal Estate Agent · Columbus Cleveland Dayton, OH · Member since 2018 · 2k+ posts · 1k+ votes
@Jimmy Lieu
You’ll want to use a commercial lender if you don’t have 2 years as a 1099. The other option is find a partner who has a W2 or 2 years of a 1099 to get the conventional fannie Mae loans.
You could always buy in cash too and refinance with a commercial lender at 70-80% LTV as well.
I’d recommend checking out LimaOne, Aloha Capital, or Wildcat Hardmoney Lending for the commercial route.
Marc Rice | Investor Friendly Agent at Reafco Tailwind Team574 Reviews - 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
HI @Jimmy Lieu!
1099 income is considered self-employment. The Fannie Mae guidelines for curation of self-employment are here and Freddie Mac's are here.
In a nutshell:
- Self employment with less than 12 months of duration cannot be used for a loan.
- Self-employment income must show up on 1 full year of tax returns (so if you started today, your 2021 tax return would fall a little short of this). If you started 1/1/21 or earlier your 2021 taxes will do the trick.
- Lenders must document that you have a 2 year history of work in a similar field. In theory your time in school could count if you studied something akin to what you are doing for work.
- But (the rub), lenders also must document a 2 year history of income at the same or greater level. If you were a graduate student with a stipend or salary as a research assistant or teaching assistant you may be able to check this box. But if you were a full-time student and not working, you won't have income to show.
My hunch is you'll need one of two things to happen for this job to work for loan qualifying... you'll either need to stick with it until you file 2022 returns or you'll need to talk them into bringing you on as a W2 employee.
Alternate options for your purchase would be to have someone cosign for you (not anybody's first choice, I know) or (if you are buying an investment property (I'm not clear on that), but using a debt service coverage ratio loan (DSCR). These programs are designed to allow investors to purchase a rental property based strictly in the cash flow the property generates. Personal income is not verified or included in loan underwriting. Instead, the rent for the property (or in some cases a percent of the rent) needs to equal or exceed the PITI.
These loans are not at the best terms, but they can be a great stop gap to get you into a property when traditional financing won't work. (And you can always refinance to improve the loan terms later.) BUT they are only available on investment/non-owner-occupied purchases.
Hope that clarifies things a little... although I know this is probably not what you were hoping to hear!
Julee
- 5yZeke ListonBusiness MemberReal Estate Agent · Columbus, OH · Member since 2018 · 1k+ posts · 1k+ votes
Originally posted by @Jimmy Lieu:
Hello BP community,
I recently just road-tripped from Portland, Oregon to Columbus, Ohio to start building my real estate portfolio here. However, I've just come across a huge hurdle. I received my job letter and it's a 33K annual salary but it's a 1099.
I am a recent college graduate so I was hoping to use my prior college experience to fulfill the two years of work experience. However, after talking to a lender, I was told this applies only to W2 positions, not 1099s. With a 1099, I absolutely need 2 years of work experience.
I have over 6 figures in investment assets right now (cryptocurrency) and over 40K in fiat. I have the cash and assets to do a 20% down payment without issue. I am hopefully looking to do a HomePossible or 20% down payment.
Are there any lenders who can provide me a pre-approval with my situation? Or what would you recommend me to do? Or should I try to find a local credit union? Would love to get some advice and insight on what to do.
If there are any Cbus investors out there, I'd love to get your recommendations especially
Hi Jimmy, it's going to be hard to get a conventional loan without two years of work history on a 1099. I would agree with Marc that a commercial lender might be the best option.
Forge Real Estate Advisors535 Reviews - Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Originally posted by @Julee Felsman:
HI @Jimmy Lieu!
1099 income is considered self-employment. The Fannie Mae guidelines for curation of self-employment are here and Freddie Mac's are here.
In a nutshell:
- Self employment with less than 12 months of duration cannot be used for a loan.
- Self-employment income must show up on 1 full year of tax returns (so if you started today, your 2021 tax return would fall a little short of this). If you started 1/1/21 or earlier your 2021 taxes will do the trick.
- Lenders must document that you have a 2 year history of work in a similar field. In theory your time in school could count if you studied something akin to what you are doing for work.
- But (the rub), lenders also must document a 2 year history of income at the same or greater level. If you were a graduate student with a stipend or salary as a research assistant or teaching assistant you may be able to check this box. But if you were a full-time student and not working, you won't have income to show.
My hunch is you'll need one of two things to happen for this job to work for loan qualifying... you'll either need to stick with it until you file 2022 returns or you'll need to talk them into bringing you on as a W2 employee.
Alternate options for your purchase would be to have someone cosign for you (not anybody's first choice, I know) or (if you are buying an investment property (I'm not clear on that), but using a debt service coverage ratio loan (DSCR). These programs are designed to allow investors to purchase a rental property based strictly in the cash flow the property generates. Personal income is not verified or included in loan underwriting. Instead, the rent for the property (or in some cases a percent of the rent) needs to equal or exceed the PITI.
These loans are not at the best terms, but they can be a great stop gap to get you into a property when traditional financing won't work. (And you can always refinance to improve the loan terms later.) BUT they are only available on investment/non-owner-occupied purchases.
Hope that clarifies things a little... although I know this is probably not what you were hoping to hear!
Julee
Hi Julee,
Great in-depth response and I appreciate you taking time out of your day to reply.
I asked my employer about this and they said they plan on switching me over to their regular payroll later this year. I don't really know what "regular payroll" means - does this mean it will count as W2?
Also, another option I heard is creating an Ohio LLC and then putting 1099 under this LLC. Then somehow paying myself through the LLC using payroll. Would that make it a W2? Is this a viable option at all or is there no such thing as that?
Jimmy Lieu, Red 1 Realty4.9119 Reviews - 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
Hi @Jimmy Lieu!
Happy to offer info. :)
You'd have to verify with your employer, but I would assume that "regular payroll" would mean a W2 employee. That will bring fix your income issue for lending purposes.If you own 25% or more of an entity for which you work, you are considered self-employed and the same rules apply. Forming an LLC doesn't really fix the issue.
Julee
- 5yRemington LymanBusiness MemberReal Estate Agent · Columbus, OH · Member since 2017 · 6k+ posts · 7k+ votes
Originally posted by @Jimmy Lieu:
Originally posted by @Julee Felsman:
HI @Jimmy Lieu!
1099 income is considered self-employment. The Fannie Mae guidelines for curation of self-employment are here and Freddie Mac's are here.
In a nutshell:
- Self employment with less than 12 months of duration cannot be used for a loan.
- Self-employment income must show up on 1 full year of tax returns (so if you started today, your 2021 tax return would fall a little short of this). If you started 1/1/21 or earlier your 2021 taxes will do the trick.
- Lenders must document that you have a 2 year history of work in a similar field. In theory your time in school could count if you studied something akin to what you are doing for work.
- But (the rub), lenders also must document a 2 year history of income at the same or greater level. If you were a graduate student with a stipend or salary as a research assistant or teaching assistant you may be able to check this box. But if you were a full-time student and not working, you won't have income to show.
My hunch is you'll need one of two things to happen for this job to work for loan qualifying... you'll either need to stick with it until you file 2022 returns or you'll need to talk them into bringing you on as a W2 employee.
Alternate options for your purchase would be to have someone cosign for you (not anybody's first choice, I know) or (if you are buying an investment property (I'm not clear on that), but using a debt service coverage ratio loan (DSCR). These programs are designed to allow investors to purchase a rental property based strictly in the cash flow the property generates. Personal income is not verified or included in loan underwriting. Instead, the rent for the property (or in some cases a percent of the rent) needs to equal or exceed the PITI.
These loans are not at the best terms, but they can be a great stop gap to get you into a property when traditional financing won't work. (And you can always refinance to improve the loan terms later.) BUT they are only available on investment/non-owner-occupied purchases.
Hope that clarifies things a little... although I know this is probably not what you were hoping to hear!
Julee
Hi Julee,
Great in-depth response and I appreciate you taking time out of your day to reply.
I asked my employer about this and they said they plan on switching me over to their regular payroll later this year. I don't really know what "regular payroll" means - does this mean it will count as W2?
Also, another option I heard is creating an Ohio LLC and then putting 1099 under this LLC. Then somehow paying myself through the LLC using payroll. Would that make it a W2? Is this a viable option at all or is there no such thing as that?
Also, another option I heard is creating an Ohio LLC and then putting 1099 under this LLC. Then somehow paying myself through the LLC using payroll. Would that make it a W2? Is this a viable option at all or is there no such thing as that?
- Yes but the UW would catch that and not count it
- Real Estate Professional · West Palm Beach, FL · Member since 2012 · 23k+ posts · 13k+ votes5y
@Jimmy Lieu Aside from whether your income is 1099 or W-2....$33k/yr isn’t going to qualify for much b
- 5yBrandon SturgillBusiness MemberReal Estate Broker · Columbus, OH · Member since 2013 · 3k+ posts · 1k+ votes
@Jimmy Lieu It sounds like you have resources and want to be in the local market...have you started your direct outreach to sellers?...acquiring through purchase money mortgage is going to be your best bet until you get squared away with your income to qualify for a loan.
- 5yBrandon GoldsmithBusiness MemberReal Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
The others gave some good options but you could always explore the idea of a co-signer if you have that possibility. It will be a higher percentage down even if you live in it but is a decent option to have. There is always seller financing as well @Jimmy Lieu
- Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Thanks for all the replies guys, I think my employer will be putting me on regular payroll later this year so it should be good to go then. And yeah, 33K annual salary doesn't qualify for too much but I'll most likely be putting 20% down in this case.
Jimmy Lieu, Red 1 Realty4.9119 Reviews - Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Originally posted by @Brandon Goldsmith:
The others gave some good options but you could always explore the idea of a co-signer if you have that possibility. It will be a higher percentage down even if you live in it but is a decent option to have. There is always seller financing as well @Jimmy Lieu
Yes, I might look at seller financing! That was definitely something I have been thinking of. Thanks for the suggestion!
Jimmy Lieu, Red 1 Realty4.9119 Reviews - 5yBrandon GoldsmithBusiness MemberReal Estate Agent · Columbus, OH · Member since 2020 · 1k+ posts · 1k+ votes
It will typically be a higher interest rate and a little bit higher down payment but is a great option to get started with you have all the capital in place. @Jimmy Lieu
- Real Estate Agent · New York, NY · Member since 2020 · 62 posts · 72 votes5y
Originally posted by @Jimmy Lieu:
Hello BP community,
I recently just road-tripped from Portland, Oregon to Columbus, Ohio to start building my real estate portfolio here. However, I've just come across a huge hurdle. I received my job letter and it's a 33K annual salary but it's a 1099.
I am a recent college graduate so I was hoping to use my prior college experience to fulfill the two years of work experience. However, after talking to a lender, I was told this applies only to W2 positions, not 1099s. With a 1099, I absolutely need 2 years of work experience.
I have over 6 figures in investment assets right now (cryptocurrency) and over 40K in fiat. I have the cash and assets to do a 20% down payment without issue. I am hopefully looking to do a HomePossible or 20% down payment.
Are there any lenders who can provide me a pre-approval with my situation? Or what would you recommend me to do? Or should I try to find a local credit union? Would love to get some advice and insight on what to do.
If there are any Cbus investors out there, I'd love to get your recommendations especially
Hey Jimmy,
This is an issue I've dealt with many times since the pandemic. I've had multiple clients on the house hunt that have had their income/tax returns change for multiple different reasons. Here's my 2 cents...
1) Commercial loans and a JV/private lender might be beneficial if you can get a good rate. These are usually higher rates than a typical conventional loan but might be a good solution to your situation.
2) You might currently see historical low interest rates but lenders tighten up on their lending qualifications during difficult times like this (pandemic, recession, economic hardship, etc). In other words, if you had trouble qualifying prior to the pandemic, it's going to be even tougher after.
3) You CAN get conventional financing without 2 years of tax returns under the right situations. For example, if you only have 1 year of tax returns but post-closing you have $200k sitting in the bank, 780 credit score, 15% DTI ratio, etc., you may very possibly still qualify. Every other screening method would have to be practically spotless but it's very much possible.
4) Not to be a debbie downer, but $33K/yr on paper isn't much when it comes to obtaining financing. But you said you have other assets which will go a long with that income.
It's difficult but it's possible. Feel free to DM me if you have any additional questions. Best of luck!
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes5y
@Jimmy Lieu taking a slightly more macro view, looks like you have done very well in crypto, and Columbus has lower priced properties....consider paying cash then refing at what are likely to be very favorable rates in the near future. Assuming you don't wipe out the crypto portfolio you have hedged that portfolio really well--now you own a stable asset with low rate fixed debt, and you would have many more options for refi, maybe popping the cash flow back into crypto. Can't speak to the tax consquences of course, but I'd give it some thought. Maybe you even wind up with a rental property HELOC...
- Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Originally posted by @Francois G.:
Originally posted by @Jimmy Lieu:
Hello BP community,
I recently just road-tripped from Portland, Oregon to Columbus, Ohio to start building my real estate portfolio here. However, I've just come across a huge hurdle. I received my job letter and it's a 33K annual salary but it's a 1099.
I am a recent college graduate so I was hoping to use my prior college experience to fulfill the two years of work experience. However, after talking to a lender, I was told this applies only to W2 positions, not 1099s. With a 1099, I absolutely need 2 years of work experience.
I have over 6 figures in investment assets right now (cryptocurrency) and over 40K in fiat. I have the cash and assets to do a 20% down payment without issue. I am hopefully looking to do a HomePossible or 20% down payment.
Are there any lenders who can provide me a pre-approval with my situation? Or what would you recommend me to do? Or should I try to find a local credit union? Would love to get some advice and insight on what to do.
If there are any Cbus investors out there, I'd love to get your recommendations especially
Hey Jimmy,
This is an issue I've dealt with many times since the pandemic. I've had multiple clients on the house hunt that have had their income/tax returns change for multiple different reasons. Here's my 2 cents...
1) Commercial loans and a JV/private lender might be beneficial if you can get a good rate. These are usually higher rates than a typical conventional loan but might be a good solution to your situation.
2) You might currently see historical low interest rates but lenders tighten up on their lending qualifications during difficult times like this (pandemic, recession, economic hardship, etc). In other words, if you had trouble qualifying prior to the pandemic, it's going to be even tougher after.
3) You CAN get conventional financing without 2 years of tax returns under the right situations. For example, if you only have 1 year of tax returns but post-closing you have $200k sitting in the bank, 780 credit score, 15% DTI ratio, etc., you may very possibly still qualify. Every other screening method would have to be practically spotless but it's very much possible.
4) Not to be a debbie downer, but $33K/yr on paper isn't much when it comes to obtaining financing. But you said you have other assets which will go a long with that income.
It's difficult but it's possible. Feel free to DM me if you have any additional questions. Best of luck!
Great reply. So I think my current plan will be waiting for my employer to switch over from the 1099 to a W2. I don't have two years of work experience so I'm planning on using my college major to fulfill the 2 years job experience. I am an applied economics and business major (and my job will be at a realtor brokerage). Meanwhile I'm waiting to get switched to a W2, I think I might try looking into seller financing instead. Would you say this is a good idea? I'm ideally looking to (at most) pay 3-4% interest rate a year and would be looking to do a 20% down.
And yes, $33k/yr isn't a lot. However, per month, that would be around $2.75k. If I keep my DTI under 50%, does that mean I can afford a monthly mortgage of $1.375k?
I have over 6 figures in crypto investment assets that generate me over $2k USD passive income a month. Would this be usable at all?
Jimmy Lieu, Red 1 Realty4.9119 Reviews - Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Originally posted by @Jonathan R McLaughlin:
@Jimmy Lieu taking a slightly more macro view, looks like you have done very well in crypto, and Columbus has lower priced properties....consider paying cash then refing at what are likely to be very favorable rates in the near future. Assuming you don't wipe out the crypto portfolio you have hedged that portfolio really well--now you own a stable asset with low rate fixed debt, and you would have many more options for refi, maybe popping the cash flow back into crypto. Can't speak to the tax consquences of course, but I'd give it some thought. Maybe you even wind up with a rental property HELOC...
Yes, I've thought about this but I don't want to buy a property all in cash especially with how high today's RE market is. I really want to leverage my cash and do either a 5-20% down payment so that I still have a ton of cash reserves and assets to deploy in case the market takes a dip. Also, my crypto assets are generating me over 2K a month passive income (and on top of that, I get appreciation) so I don't want to necessarily sell my crypto unless I see a real estate crash or a really good deal that would absolutely make sense to do.
Hmmmmm..... trying to think of what to do!
Jimmy Lieu, Red 1 Realty4.9119 Reviews - Real Estate Agent · New York, NY · Member since 2020 · 62 posts · 72 votes5y
Originally posted by @Jimmy Lieu:
Originally posted by @Francois G.:
Originally posted by @Jimmy Lieu:
Hello BP community,
I recently just road-tripped from Portland, Oregon to Columbus, Ohio to start building my real estate portfolio here. However, I've just come across a huge hurdle. I received my job letter and it's a 33K annual salary but it's a 1099.
I am a recent college graduate so I was hoping to use my prior college experience to fulfill the two years of work experience. However, after talking to a lender, I was told this applies only to W2 positions, not 1099s. With a 1099, I absolutely need 2 years of work experience.
I have over 6 figures in investment assets right now (cryptocurrency) and over 40K in fiat. I have the cash and assets to do a 20% down payment without issue. I am hopefully looking to do a HomePossible or 20% down payment.
Are there any lenders who can provide me a pre-approval with my situation? Or what would you recommend me to do? Or should I try to find a local credit union? Would love to get some advice and insight on what to do.
If there are any Cbus investors out there, I'd love to get your recommendations especially
Hey Jimmy,
This is an issue I've dealt with many times since the pandemic. I've had multiple clients on the house hunt that have had their income/tax returns change for multiple different reasons. Here's my 2 cents...
1) Commercial loans and a JV/private lender might be beneficial if you can get a good rate. These are usually higher rates than a typical conventional loan but might be a good solution to your situation.
2) You might currently see historical low interest rates but lenders tighten up on their lending qualifications during difficult times like this (pandemic, recession, economic hardship, etc). In other words, if you had trouble qualifying prior to the pandemic, it's going to be even tougher after.
3) You CAN get conventional financing without 2 years of tax returns under the right situations. For example, if you only have 1 year of tax returns but post-closing you have $200k sitting in the bank, 780 credit score, 15% DTI ratio, etc., you may very possibly still qualify. Every other screening method would have to be practically spotless but it's very much possible.
4) Not to be a debbie downer, but $33K/yr on paper isn't much when it comes to obtaining financing. But you said you have other assets which will go a long with that income.
It's difficult but it's possible. Feel free to DM me if you have any additional questions. Best of luck!
Great reply. So I think my current plan will be waiting for my employer to switch over from the 1099 to a W2. I don't have two years of work experience so I'm planning on using my college major to fulfill the 2 years job experience. I am an applied economics and business major (and my job will be at a realtor brokerage). Meanwhile I'm waiting to get switched to a W2, I think I might try looking into seller financing instead. Would you say this is a good idea? I'm ideally looking to (at most) pay 3-4% interest rate a year and would be looking to do a 20% down.
And yes, $33k/yr isn't a lot. However, per month, that would be around $2.75k. If I keep my DTI under 50%, does that mean I can afford a monthly mortgage of $1.375k?
I have over 6 figures in crypto investment assets that generate me over $2k USD passive income a month. Would this be usable at all?
I might be reading your first few sentences out of context, but please be clear that a lender will NOT substitute your college credits as work experience. If you're saying that you're going to use your college degree to get a job that you will work for 2 years to get the experience, ok. But I've never heard of any lender using college credits to substitute the 2 years of tax returns. And yes, seller financing is a great idea especially if the seller isn't in a time crunch.
Your DTI should be significantly lower than 50%. Lenders like to see it lower than 33%. I can't really answer the "can you afford" question because I'm not a lender but DTI is simply a tool lenders use to calculate if you can afford to pay back the loan. I'm not familiar with crypto but I've yet to have a client use crypto as a form of assets or use crypto as a form of payment so I'm not the best person to answer that question. I would research a local mortgage broker to see what advice he gives you on that.
- Rental Property Investor · Boston, Massachusetts (MA) · Member since 2016 · 2k+ posts · 2k+ votes5y
@Jimmy Lieu I don't disagree with your approach. My point is that all cash then a quick refinance with your w2 in place is likely the only way you will get to a loan given your near term circumstances. Once you own a cash flowing property you will find lenders more responsive. I think you would be looking at 65%LTV though The institutional loan you seek just isnt out there, and if it is it's going to have punitive conditions. I wouldn't suggest doing it with all your assets but if it's a fraction? Even a significant fraction? it's your quickest path. Seller financing is another option of course, but that's not as easy as people make it out to be and often happens with capital intensive properties.
One thought, put some assets to a 401k plan and use the 401k for a loan to yourself with a payback of 15 years. Maybe you can find one that allows crypto even. only works over 15 if u are house hacking. It's 5 for a non primary by IRS policy. Doesn't count against your DTI
- 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
Quick aside to @Francois G.
Lenders regularly use education in a related field as part of (even all of) a 2 year work history.
It's most straightforward when the degree directly relates to the job: recent med school grad who's signed a contract with a hospital, engineer with a job at an engineering firm, accountant, RN, etc. But even in fuzzier cases this can work just fine: marketing and communications degree who is going into a customer service or sales position, for example.
Back in the day, I was a philosophy major... I'd probably not gotten too far using my degree to show a two year history of experience in, well, anything. :)
But most semi-professional degrees with a related(ish) field work just fine.
And the DTI issues everybody raises are real... but not insurmountable. Once @Jimmy Lieu is paid via wages/W2. I'm working on a file right now for a guy who makes less. He's got a very low housing expense (super-low front DTI) and is buying a rental property so the rents are largely offsetting the PITI. Even his modest income keeps his DTI where it needs to be.
I've even done a few loans for clients with zero income who had no primary housing expense (living with a partner/family), but are financing a cash-flow positive rental property and have little/no other debt. Fannie/Freddie rules for rental income recently tightened a little for scenarios like this, but they still doable if the borrower's situation checks the right boxes.
Fun conversation... thanks everybody!
- Real Estate Agent · New York, NY · Member since 2020 · 62 posts · 72 votes5y
Originally posted by @Julee Felsman:
Quick aside to @Francois G.
Lenders regularly use education in a related field as part of (even all of) a 2 year work history.
It's most straightforward when the degree directly relates to the job: recent med school grad who's signed a contract with a hospital, engineer with a job at an engineering firm, accountant, RN, etc. But even in fuzzier cases this can work just fine: marketing and communications degree who is going into a customer service or sales position, for example.
Back in the day, I was a philosophy major... I'd probably not gotten too far using my degree to show a two year history of experience in, well, anything. :)
But most semi-professional degrees with a related(ish) field work just fine.
And the DTI issues everybody raises are real... but not insurmountable. Once @Jimmy Lieu is paid via wages/W2. I'm working on a file right now for a guy who makes less. He's got a very low housing expense (super-low front DTI) and is buying a rental property so the rents are largely offsetting the PITI. Even his modest income keeps his DTI where it needs to be.
I've even done a few loans for clients with zero income who had no primary housing expense (living with a partner/family), but are financing a cash-flow positive rental property and have little/no other debt. Fannie/Freddie rules for rental income recently tightened a little for scenarios like this, but they still doable if the borrower's situation checks the right boxes.
Fun conversation... thanks everybody!
Thanks for clarifying that Julee. I've never had a client use any college experience to substitute tax returns so I was under the impression this wasn't even a thing. Glad to hear it is!
- 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
No problem, Francois! :) Enjoy the rest of your Sunday!
- Real Estate Agent · Columbus, OH · Member since 2019 · 3k+ posts · 2k+ votes5y
Originally posted by @Julee Felsman:
Quick aside to @Francois G.
Lenders regularly use education in a related field as part of (even all of) a 2 year work history.
It's most straightforward when the degree directly relates to the job: recent med school grad who's signed a contract with a hospital, engineer with a job at an engineering firm, accountant, RN, etc. But even in fuzzier cases this can work just fine: marketing and communications degree who is going into a customer service or sales position, for example.
Back in the day, I was a philosophy major... I'd probably not gotten too far using my degree to show a two year history of experience in, well, anything. :)
But most semi-professional degrees with a related(ish) field work just fine.
And the DTI issues everybody raises are real... but not insurmountable. Once @Jimmy Lieu is paid via wages/W2. I'm working on a file right now for a guy who makes less. He's got a very low housing expense (super-low front DTI) and is buying a rental property so the rents are largely offsetting the PITI. Even his modest income keeps his DTI where it needs to be.
I've even done a few loans for clients with zero income who had no primary housing expense (living with a partner/family), but are financing a cash-flow positive rental property and have little/no other debt. Fannie/Freddie rules for rental income recently tightened a little for scenarios like this, but they still doable if the borrower's situation checks the right boxes.
Fun conversation... thanks everybody!
Hi Julee
Your answers make me feel so much better about my situation! One more quick question - how do lenders add rental income to your DTI? Does it vary by lender?
And does it work the same way for a SFH and multi? For example, if I wanted to house hack a SFH and live in one of the bedrooms and rent the other bedrooms out, would I be able to add rental income from those other bedrooms? Or how exactly?
Jimmy Lieu, Red 1 Realty4.9119 Reviews - 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
@Jimmy Lieu, if you're going to live in the property the rules are quite different for SFR vs multi-family.
For 2-4 units, 75% of the appraiser's estimation of the market value of the other units will be added to your income. You'll be presumed to be moving into the biggest/nicest unit.
For SFR you can only count rental income if you are receiving rent from a live-in aid (if you are disabled) or under certain special programs HomeReady and Home Possible. Boarder income (or income from an ADU) can make up no more than 30% of your qualifying income. To use it you have to be able to demonstrate you've received income for at least 9 of the prior 12 months and that your boarder will be moving with you. An average of actual income (capped to the 30% number) gets added to your income before your DTI is calculated.
if you buy a place with an ADU, we can ask the appraiser to tell us the market rents for the ADU and use 75% of it (capped to 30%) as part of your income.
Fannie has a nice explainer PDF here.
Now for the bad news: Unless you get a raise with your transition to W2 status, your DTI is probably going to be quite high relative to qualifying for a property in Portland. An owner-occupied purchase is going to be tough without more income.
SFR with an ADU will probably work best. If you're looking at multi-family try to look for the very lowest cost duplex you can... but even that isn't likely to work out numbers wise for a conforming loan without a boost to your pay.
Your DTI is tremendously more likely to work if you can find a nice affordable place to rent and then go look for a property that'll cash flow decently with what you can put down.
- Rental Property Investor · Columbus, OH · Member since 2019 · 11 posts · 11 votes5y
@Jimmy Lieu i’ve been running into the same problem. Started self employment working in 2019. With all the lenders I’ve talk to, I realized that the easiest option is to get a partner who has that W2 job!  Then eventually you can refinance in your name and pay them off!
- 5yJulee FelsmanPro MemberLender · Portland, OR · Member since 2018 · 163 posts · 136 votes
@Jimmy Lieu And a quick addendum. I just noticed I had to/from flipped in my mind. In Ohio your DTI won't be nearly as out of line as it would be in Portland. (I'll defer to the real estate brokers here, but thus far all of my clients buying in Ohio have spent tremendously less per door than my clients in Portland.)
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