The Mortgage World Has Secret Menus

You can have an 800 credit score, real money for a down payment, and steady cash coming in every month and still get told “no” because your tax returns do not tell the story lenders want to see. We dig into the mortgage reality behind that disconnect and explain why “not W-2 friendly” does not mean “not mortgage ready.” If you are self-employed, paid on a 1099, or building a rental portfolio, there are home loan programs that may fit better than the standard conventional loan playbook.

We walk through bank statement loans and how lenders use business deposits to estimate qualifying income without relying on tax returns. We also cover 1099-only mortgage programs that can be especially helpful for real estate agents and independent contractors, including how income is calculated and why these loans usually come with higher interest rates and stricter down payment requirements than government-backed options.

Then we shift to real estate investing and DSCR loans, where the property’s rental income is the centerpiece. If the rent supports the monthly payment, the deal may qualify even if your personal income documentation is messy. Along the way, we talk through a practical way to compare costs: paying a higher mortgage rate now versus paying significantly more in taxes just to “show” higher income, and how refinancing can factor into your plan.

If you know someone who has credit and cash down but thinks the answer is automatically no, share this with them. Subscribe for more straight talk on mortgages and real estate, and if you found this helpful, leave a review and tell us what loan question you want answered next.

You can always find U. S. Home Talk and connect with the hosts and the community at their facebook page https://www.facebook.com/U.S.HomeTalk/ or at our website, USHomeTalk.com

Transcript

Welcome And Show Purpose

Mike Ouverson 0:14

Hey, good afternoon, everybody. Welcome to U.S. Home Talk. We are your podcast for real estate and mortgages, talking anything and everything dealing with real estate, mortgages, all the current event stuff that you hear and see out there in the media. We like to bring those things up, talk about them, uh, and uh answer your questions as well. Uh so you can join us uh live on our shows, or you can look at all of our past shows too at our website, ushometalk.com. Uh there you'll find uh everything. Our past shows, you'll find free reports on buying, selling, all a bunch of information there. Um so go ahead and check us out at US Home Talk there. Um and then you can also connect with us during the week as well. On the show with me today uh are my two hosts here. We got uh Marcus Walgrave with the South Dakota Home Team, powered by head realtors. We have Jason Walgrave, Walgrave Real Estate Group with Remax Advantage Plus.

The Standard Mortgage Loan Box

Mike Ouverson 1:10

And today we are talking about home loan programs you did not know existed. Okay, this is an exciting show. Everyone loves talking about finances, right? Everyone's a numbers person, everyone loves talking about financing. I know, so this is gonna be like a record show. We're gonna get record views on this one. I can feel it. All right, so today, home loan programs you didn't know existed. Okay, we all know the traditional box out there, right? We got your traditional, you got your conventional loans, you have your FHA loans, you got your VA loans for our vets out there. I love the VA loan program, think it's the best one out there uh by far. We have your USDA loans, which is a rural development program, right? A lot of people don't know about that one, but that is out there. But those are your standard kind of core four type of loans. Okay, but they all have one thing in common. You got to qualify traditionally, which means you have to show the income needed to qualify on your tax returns, on your W-2s, on your pay stubs, things like that. Okay. The programs we're gonna be talking about today, and most of the programs we're talking about today, are for those people that have the good credit. You have money to put down, but you don't show the income on your taxes. Okay. Well, does that make you a bad borrower because you don't show your income on your on your taxes? You're clearly not a bad borrower because you got excellent credit and you got a bunch of money to put down. So it's not like it's not like that just happens, right? It's not like you just open up your, you know, you found this round paper sack on the side of the road and it's like, hey, this this sack just gave me an 800 credit score.

SPEAKER_03 2:43

Sweet, right?

Mike Ouverson 2:44

That just doesn't happen on accident, right? Credit scores that's earned, you know, your credit score is earned. Saving money, having money to put down, that's that you've earned that, right? So um, but there's certain obviously IRS rules as far as your taxes go to where maybe you don't have to file and show that income on your tax returns. So then how do I qualify for these traditional programs where I gotta show my income on my tax returns in order to qualify for them? Okay, sometimes that's a hurdle. So how we skin that cat is um we can go to some of these alternative documentation

Bank Statement Loans Explained

Mike Ouverson 3:15

programs. Okay, so the first one I'm gonna talk about is a bank statement loan. Okay, so we have bank statement loans out there. What is that? That's for your self-employed borrowers. I own, maybe you're maybe you're just a sole proprietor, right? You have, you know, you got your home business that you run out there. Maybe you're uh maybe you're a photographer, right? And you do you work with Jason and Marcus on listings, right? You do all real estate photos. You do the photography for their listings, you do the drone stuff for their listings, that's your business. You got that business going on there, okay? So you have that business, you got excellent credit, you got money to put down, but you can also write off a lot of your expenses there, and you don't show the income needed on your taxes, taxes to qualify for one of these traditional programs. But you have a lot of money coming in. So let's say you have $25,000 of deposits coming in every single month because you have a lot of high-end listings that you do, you got to work with a lot of serious estate agents, maybe you have a little small team underneath you or something, and you got $25,000 coming in. Well, what we'll do is we'll do a bank statement loan program. Okay, we don't look at your tax returns, we look at your business bank statements and we look at the deposits coming in in those business bank statements, and then we use a percentage of those deposits coming in in your business bank statements, and we take an average over the last 12 months. Okay. So the average over the last 12 months is what we get to use now for in monthly income to qualify you for this particular loan program. Okay, so real life example, I had a guy that owned uh a delivery business. Okay, he had a couple single cars, right, that would take small packages. He had a box van that he had for larger ones, and they had one semi. Okay. If I went through his tax returns and calculated how much income we could use on his tax returns for one of the traditional programs, right, he had $1,500 a month of income I could use to qualify.

unknown 5:04

Okay.

Mike Ouverson 5:06

You're not gonna get qualified for anything, right? Okay. Now I do the bank statement program. Okay, I do the bank statements. I got his 12 months worth of business bank statements, calculated the income. Guess how much income I had for him now to use on a monthly basis? Monthly income to use to qualify.

Marcus Walgrave 5:21

20? 10 grand.

Mike Ouverson 5:23

I had 52,500. What can you qualify for with monthly income of 52,500 a month coming in?

Jason Walgrave 5:31

Pretty much whatever you want.

Mike Ouverson 5:32

Whatever you want. Okay. So that's that's the power of these programs is under the traditional stuff, right? Under the traditional programs, he had no shot at qualifying and getting a mortgage. Okay. Now, when you get into these alternative documentation programs like this, now he can buy whatever he wants. And he's clearly a good borrower. The guy had like two and a half million dollars of of gross revenue coming into his business a year. Jeez. Okay. He had the great credit, he had money to put down, he just didn't show the income on tax returns. We had a solution for him. Okay. Um, so

1099 Only Loans For Agents

Mike Ouverson 6:05

let's go to the next one. Another one is a 1099 only program. This one is great for real estate agents. Okay, most real estate agents are 1099. Okay, so on this particular program, again, we don't look at tax returns. We don't look at them. Okay, we look at your 1099 that you get from your brokerage at the end of the year. We take 90% of that 1099, and that's what we can use for to qualify.

unknown 6:25

Wow.

Mike Ouverson 6:25

So if you're a real estate agent making 150 grand a year, your 1099 comes over, you've grossed to 150 grand. We could use 90% of that. I have now 135 grand a year of income to use for you to qualify on that program.

Jason Walgrave 6:37

That's fantastic.

Mike Ouverson 6:39

Does not matter what your tax returns say.

Jason Walgrave 6:40

What kind of interest rate? So let's say traditional, um, just for easy numbers, let's say traditional conventional rate is at six percent. What what would you know,

Why Rates Rise Outside Conventional

Jason Walgrave 6:50

good credit and all that stuff, what would the rate be on this program?

Mike Ouverson 6:53

Because it's gotta be a little higher, right? It's a little bit higher. Yeah, whenever you get outside of the traditional box, and this is gonna be a longer answer, so but I'll I will circle back around to it, okay. Um, you're out when you get outside of the traditional box, right? That the traditional conventional FHA box, right, that I was talking about earlier, anytime you get outside that box, the rates are gonna be higher. Your down payment requirements are gonna be more, your interest rates are gonna be higher. Okay. Now, the one thing our government does right, right, is setting interest rates and having 30-year fixed loan programs. If we did not have our federal government involved in the mortgage world, okay, we wouldn't have Fannie Mae, we wouldn't have Freddie Mac, we wouldn't have FHA loans, we wouldn't have VA loans, we wouldn't have USDA loans. Okay. What you would have is you would have banks like, let's just say some big box banks, you'd have the Wells Fargos, the US banks, the Bank of America's. You could still go to those banks and get mortgages. You're not gonna get a 30-year fixed. You might get a 30-year loan, but the rate is only gonna be fixed for five years and it's gonna adjust after that. They're all gonna be adjustables, right? Okay, and they're all gonna require probably a minimum of 15 to 20% down. Okay. So the government stepped in and made these programs, right? So that we could get in a conventional loan on a 30-year fix as little as 3% down. We could do an FHA loan with not as good a credit out there with only 3.5% down and still get a 30-year fixed at a 6% rate today. Okay, so that's the one thing that our government got right. Um, the thing that our government didn't get it right is hey, this is how you have to qualify. You have to show the income on your tax return. Okay, that's where these other programs come into play. Okay, so these other programs, the government regulates them, but is not like directly involved in setting the rules for them. Okay, so it's like investment companies, things like that on the back end that are setting the terms and setting the rates and setting the requirements for these particular programs. And the government says, Hey, we'll allow you to do these as long as you can document the ability of that particular client to repay the loan back. Okay, so then they just got to make sure they meet the government's requirements of the ability to repay. So as far as interest rates go, right? So this is outside of the traditional box, things like that. The one guy that I was talking about that owned the trucking company, okay, he had 40% to put down. He had a big down payment, okay, and he had really good credit. He I got him a 6.75 rate on a 30-year fixed.

Jason Walgrave 9:07

Dang.

unknown 9:08

Okay.

Mike Ouverson 9:10

Right? Um, now if if that same borrower had 10% down, if he had 10% down, his rate's closer to 8 to 8. Okay. And now if you have a little bit, you know, if you weren't top-tier credit, but you still had like your 700, 710 credit score and 10% down, which is the minimum on these programs, is 10% down when you're buying a primary residence. He probably would have been at 8.5, maybe 9.

unknown 9:34

Okay.

Mike Ouverson 9:34

Okay. So his top-tier credit and his big down payment got him down into the sixes on a 30-year fixed. Some people might be eight and a half, nine if they're a little bit less on the credit scale and they have less down.

Jason Walgrave 9:45

Yeah.

Marcus Walgrave 9:46

Mike, does it go ahead, Jason? Sorry. Go ahead. I was just gonna say, um, you know, the the the one example is the 40% down, right? I mean, is it like once you get up once you get to 20, 20 is perceived to be the same as 30 and 40? Or does it still kind of like the more you put down, the the closer you're gonna get to uh a traditional uh market rate?

Mike Ouverson 10:08

Yep, the more you put down. So I ran his numbers, I showed him here's what 10%, 20%, 30%, 40% looks down because he wanted to see the scale. He did get a drop in his interest rate with each chunk. Now, once he hits 40% down, 50% down, everything else from there on down, it's gonna be the same. But we looked at 30% versus 40%, and he still gained a quarter better interest rate. And he's like, I got the money, I'll take the lower rate, I'll put the 40% down and you know, and save save myself some money there.

Tax Write Offs Versus Higher Rates

Jason Walgrave 10:35

So I I think what what's interesting is is that most folks don't realize that these programs are available, you know, and and because you just you know, you kind of think, oh, I gotta put you know 20% down and I gotta have great credit and I gotta be able to show W2 tax returns and you know, because that's what's you know usually that's out there, right? But you know, we we've you know out of all the years we've been doing this, and and it it's been a f it's been a few years, we we've always said, and this is true, that if you want to buy a home, regardless of the position that you're in, we can we can show you how to do that. We need time and a plan, right? And so even if that means you know you just went through a foreclosure or a bankruptcy or whatever the case is, you know, it it might take some time to get there, but we can create that plan and if you follow it, you know, maybe it means we gotta we gotta you know work on your credit, we gotta rebuild your credit, maybe it's you gotta save up X amount for down payment. But anybody that wants to buy a home, we can help you get there with with time and a plan. Um Mike at Luminate, I mean you guys have pro products that most don't. Um we also have um contract for deed partners that we work with that you know that we've had situations where people have just went through a bankruptcy like two months ago, you know, or they you know or they lost their job or what and their their credit is shot and you know everything went to heck and but uh they they acquired a new job and they're making good money and they've got some cash, right? And so there's you know, with with the programs that Luminate has and with the other partners that that we have out there, it it's uh uh incredibly unlikely that we can't get you into a house very quickly. Um worst case scenario, it's gonna take time and a plan. And that's what we're here to do is help people achieve their real estate and home buying goals. Um, and we can get there with time and a plan.

Mike Ouverson 12:31

Now, before these programs came out, what we would do traditionally, right, for the self-employed borrowers, right? What we would do is say, hey, here's what your tax return looks like now, right? Here's the income you show. If you want to buy a $400,000 house, you're gonna have to show this much income on your next two years' worth of tax returns, okay? Because that's the income you need to show to qualify for these traditional programs that were out there. Okay. So now you got to show the higher income and you're waiting, and now you're paying the income taxes, you show more income. Okay. So now these programs come out and you get a self-employed borrower. It's like, okay, here's your two options. You can either show the income on your tax returns for the next two years, right? And and hold off for 24 months before you buy a home, okay, and then pay the income tax, or we can go with this program over here, right? And maybe you have 10 to 15% down, your rate's gonna be eight percent. And they're like, Well, eight percent, that's that's just too high. That's that I that I'm not gonna pay eight percent. And I say, Well, here's your comparison, okay. How much are you gonna pay in taxes, income taxes, for the more income you're gonna show on your tax return so that you can wait two years and get a six percent interest rate? Well, I'm gonna be paying a lot, right? And you work the math, and it's like I'm gonna be paying 35% of what that gross is that I gotta show. Okay, well, how much more are you gonna pay on an 8% interest rate versus a six percent interest rate?

SPEAKER_03 13:50

Right.

Mike Ouverson 13:50

Okay, I'm gonna pay, you know, 350 bucks more, let's just say, or 300 more. Well, what's cheaper? Right? The how many thousands, tens of thousands of dollars you gotta pay in income tax or paying an extra 300 bucks a month. Yeah, and by the way, that 300 bucks a month, you get a reduced, right? You get a that's a mortgage interest, it's a deduction on your next tax returns that you that you file, right? So now you gotta pay even less taxes on your next future uh tax returns coming up. And I show them that comparison, and then the light bulb goes off. And they're just like, I would be happy with that 8% interest rate. Let's do it, right?

Marcus Walgrave 14:23

And his history has proven that the value of that home is likely going to increase. So you you get to cash in on the two years of owning it instead of the two years waiting to own it.

unknown 14:33

Yeah.

Marcus Walgrave 14:34

So there's a there's a lot of compounding uh benefits.

Jason Walgrave 14:38

And just to bring some additional clarity to to Mike's comment about you know showing the income um on your taxes, and what what does he mean? Well, what he means is that as a business owner, you have eligible deductions, you know, write-offs, because you're doing business and you have you can you can reduce your taxable income because of uh the available from the you know from the government, from the IRS, the available write-offs. Well, it means not taking those deductions, not taking those write-offs to show higher income, which means you gotta pay more taxes on it. So it is you know, it's about you know, and and Mike, that that example is fantastic because it's oh, I don't want to pay eight percent. Okay, well, you pay six percent over here, but you can't take those deductions because you got to show the income, which means you're gonna have this massive tax bill, or you pay a higher interest rate, which is three, four hundred bucks a month more, which comes out to be what, four grand a year. Well, just think you're gonna refinance in two years anyway, right? And and so I mean there's you know, there's different pot there's different options, but you just break Mike, you do a phenomenal job of breaking down the numbers, showing it side by side. Okay, what does this mean? You know, what's my bottom line, you know, what's the cost and the monthly cost, and then you can make the decision what's best for you.

Mike Ouverson 15:56

Exactly. Yeah, we're gonna go to legal minute. There's another one coming up here that we're gonna talk about. It'll be the last program that we're gonna talk about today. It's for investment properties. Um, it's kind of unique, but not unique, and I'll explain what I mean about that, but we'll go to legal minute first and then we'll come back

Legal Minute Truth In Housing

Mike Ouverson 16:10

and talk about it.

Jeff O'Brien 16:10

This is Jeff O'Brien, attorney with Hush Blackwell with the U.S. Home Talk Legal Med. Several Minnesota cities require truth in housing inspections prior to the sale of a home. In Minneapolis, for example, a truth in housing evaluation is needed for any sale of a single family house, duplex, townhouse, or first-time condo conversion. The report needs to be done within three days of offering the property for sale and before it can be shown to prospective buyers. The evaluation can only be done by Minneapolis licensed evaluator. The evaluation covers certain items and identifies required repairs. Copy the evaluation report, the certificate of approval if issued, and the list of repair items can be found on the city's property information website. The truth in housing evaluation must also be displayed on the property so potential buyers can view it. Repairs must be made when a house is sold. Buyers must sign the acknowledgement of responsibility unless a certificate of approval has been issued and file it with the city of Minneapolis within one day of the closing. The buyer then has 90 days to complete all required repairs. After the repairs have been completed, a reinspection must be done. Before you list your home for sale, be sure to check with your city to find out whether you are required to have a truth in housing evaluation performed. This is Jeff O'Brien, attorney with Hosh Blackwell with a U.S. Home Talk Legal Med.

Mike Ouverson 17:15

Thank you, Jeff. Very good info. If you are a home seller out there and you're like, what is Jeff talking about? This truth in housing, I gotta check with them with it. Your real estate agent will do that for you, so just plug in with the top agent. They will take care of that. You don't have to worry about it. So

DSCR Loans For Rental Properties

Mike Ouverson 17:30

um, okay, last loan program. The loan program that you didn't know existed. Last one we're gonna talk about today. It's called a DSCR. Does anyone in the room know what DSCR stands for? Evan, you can answer too.

Jason Walgrave 17:42

Disker debt service something, something.

Mike Ouverson 17:47

Yep. Debt service coverage ratio. There you go. Okay, 50% right. 50% right. Okay. And so and so this is this is a newer program on the residential side. But to be honest with you, if anyone has done any commercial out there, this this type of qualifying has been around for years on the commercial side. This is how commercial properties and commercial loans are done. This is how they qualify, right? Finally, the light bulb went off of someone and be like, well, on investment properties and investment properties, like a commercial property, I got I got a payment that I need to make to keep this thing, and then I have income coming in from my renter, right? Just like a tenant in a commercial building is is the income coming in. So why can't we just do the same thing on the residential side of things? Makes sense. Let's do it, right? So you come up with DSCR loans, right? We don't look at tax returns, we don't look at your income. These are the easiest loans to qualify for, to be honest with you, as long as again you got the credit and the money down. Okay, all we do is look at the property. How much rental income is that property going to bring in? Okay, let's say it's $3,000 a month. Okay, you need to put at least 20% down on the property then, and then you need to put additional money down if you need to to get your monthly payment down to $3,000. Because all we care about is that if this property brings in $3,000 a month, we want the monthly payment on this thing to be $3,000 a month or less. And if you can do that, you qualify. Doesn't matter what other program, what other houses you have, doesn't matter what other debts you have. We're looking at this specific house, as long as the income coming in on that thing is the same or greater than the monthly payment that needs to be paid on it, we're gonna give you that loan.

Jason Walgrave 19:20

It's fantastic.

Mike Ouverson 19:22

Makes sense, right?

Jason Walgrave 19:23

Yep.

Mike Ouverson 19:24

Now these people gotta have money down, right? You still gotta have the money down, just like all these programs out there. Still gotta have the money, still gotta have the credit. Okay? You gotta every single loan program, you gotta have the money and the credit. But as long as you have that, now you qualify using this and it's great.

Jason Walgrave 19:39

It's awesome. Do they have a lot of like limits? Yeah, yeah. Limits on how many of those loans you can have?

Mike Ouverson 19:45

Nope.

Jason Walgrave 19:46

Or the dollar amount of the loans.

Mike Ouverson 19:48

I literally have a guy right now that um looked into this. He's just like, there's a million dollar property that I might want to buy on this. Now it was in a market where the right it's just higher. Like a million dollar here is like your average price in the right, it's a Florida market, right? Million dollars, like your average price of the home there. So it's not like you're buying a million dollar home in Hardwick, Minnesota, you know, and trying to rent it out to get it, you know, to qualify, right? So it's higher dollar amounts, it's higher rents coming in, it's it matches the market there, right? And so I said, no, there is no loan limit. If you want to do a million, you got your 20% to put down. That's the minimum you can put down in this thing. So if you got your 200 grand that you're gonna put down plus pay your closing costs, and you want to buy this million dollar home, we will qualify it the same way. And if it qualifies, you're you're good.

Jason Walgrave 20:32

Residential properties or commercial both.

Mike Ouverson 20:34

This is um, it's on both. I mean, I'm talking about residential because I do all residential stuff, but I mean, the DSCR ratios, right, that we're talking about how you qualify. This is how commercial loans have been qualified for years, like way before I even got in the business, which was June of 04. Yeah, right. So it's just finally like the again, it's like the light bulb went off of like, well, if you do that on the commercial side of things, why can't we do it on the residential side of things? Right? And so these programs now exist today because of that.

Jason Walgrave 21:04

Love it.

Time And A Plan Closing

Mike Ouverson 21:05

So time and a plan. Time and a plan, right? It's it's the thing. Make a call to someone. Make a call to someone. Here's the deal. I got credit and I got money, but I don't show the income. Like, can I do anything? Right? Yeah. That answer is you can't.

Marcus Walgrave 21:19

Don't assume the answer is no.

Mike Ouverson 21:21

Yep. Yep. Make a call um to your real estate professional. They're start with number one. They have a network of connections, just like Marcus, just like Jason. They got a network of connections of like, hey, I might not be the guy to get you that answer, but I know a guy, right? I got a guy that does this. Let's get him involved. Let's get that answer for you. So love it. All right, folks, we appreciate you tuning in today. Uh, we will be back next week with another show. Check us out at ushometalk.com. All our previous shows are there or any other podcast service you use. On behalf of Marcus Walgrave and Jason Walgrave, I'm Mike Overson. We'll see you next week.