Podcast Interview—The Business Credit & Finance Show
Episode 750: The Business Credit and Financing Show with Ty Crandall
Alejandro talks to show host Ty Crandall about real estate financing for business owners, entrepreneurs, and self-employed professionals.
Interview highlights:
Possibilities for self-employed to get a mortgage
Why entrepreneurs typically get denied when applying for a home loan
Why the automation of the mortgage process hurts business owners
When to use tax returns to prove your income
How mortgage rules sometimes destroy the ability for entrepreneurs to get a mortgage
How expert brokers determine the best loan for self-employed borrowers
4 ways to prove income outside of tax returns
How to know what percentage of deposits in a business bank account can be counted as income
Typical debt ratios to qualify for a mortgage
Percentage you may need down as an entrepreneur to buy a home
How to use low risk factors as compensating factors to put less money down
How to find the right broker to help you close your home loan
Visit the Business Credit and Finance Show’s official podcast page.
Podcast Transcription:
Ty Crandall: Hello and welcome to the show today. I'm really glad you could join us. So today we're diving into a topic we'd never dove into, but it's something that I think is really important, especially if you ever want a home. You wanna own a home, you own a home, you wanna own more homes? Well then you need to know how to be self-employed, how to be a business owner, and still be able to qualify for mortgages. I mean, there was a time with the 2008 mortgage crisis where this was really hard. Is it still hard? Is there a way to get a home loan if you are self-employed? What's the best way to do it? To get the best rates? I don't know. That's exactly why I brought Alejandro on here today to teach us. So being self-employed and being a self-employed listener, you work really hard to create your business, right, and you wanna own your home, but unfortunately, a lot of people that own businesses don't qualify because they're self-employed. So how can you actually get access to the mortgage capital you need? Well, that's exactly what we're gonna be diving into. So Alejandra Szita and his team are here and are experts on just this. Now, he's actually discovered that those normally ignored and overlooked within the real estate loan market can succeed with his little known secrets. Now he specializes in helping self-employed and agents understand the mortgage market access deals that many brokers didn't even know existed, and his results speak for themselves. Alejandro, thanks for joining us.
Alejandro Szita: Thank you, Ty. Thank you for that wonderful introduction. It's a pleasure to be here and thank you for giving me a voice to your audience.
Ty Crandall: Yeah, and I appreciate it. And you know, it talks about your results speaking for itself. So how do you do, what kind of results do you have with helping business owners and self-employed entrepreneurs actually be able to get home loans?
Alejandro Szita: We get routinely calls from people that have been denied mortgages all the time. They usually call us as the last resort. And I would say every single person except one person in the last 15 years, we've been able to get them a loan. That single person that we were not able to get a loan for, it's not that we didn't, we were not able to get her a loan right there and then. But after a year, she will qualify to get a loan. So it is perfectly possible to get a loan as a self-employed, even if you are like a successful artist. We've helped a lot of successful artists also get a loan. And then the number one problem that we see is this, the successful artist, the successful self-employed person, the successful business owner, initially they are completely 100% convinced that they can get a loan.
They go to the bank, they go to the credit union. They go to the bank, which they think they have a relationship with. And this is where the actual nightmare begins, when the bank, they think they have a relationship because they have an account there, maybe they've had it for like five years, even a successful business owner, we're doing a loan right now who had an account at a major bank for 20 years. So he thought he was set and he sells tens of millions of dollars of product every year. So this is like a medium sized business owner. He was denied on a technicality. And this happens over and over and over. And I'm sure that you know, because you told me that you used to work on the mortgage business as well.
Ty Crandall: Yeah, and you know what I don't understand? Here's what I don't understand, is that the majority of wealth in this country is from small business owners. They are people that own businesses. So why the heck would this be the most ignored segment? Because it is. Like, the people that struggle to get the money the most for mortgages I found are in large part or people that are self-employed or don't have W-2 income. So why do most people ignore this segment of the market considering we are the majority of wealth? Like you'd think everybody would wanna cater to us, but it doesn't happen that way.
Alejandro Szita: It doesn't happen. We are the six, I like to call us, we are the 6%, not the 1%, but the 6%. Because according to a survey that I read, business owners account for 6% of the borrowers. When I say borrowers, I mean people that apply to get a loan. Even though we are only the 6%, we are 90% of the economy, like you said, we move everything. However, when it comes to the number of loans that bankers get, we are an actual minority. So many years ago, around the seventies or the eighties, the bankers made a choice. They said, look, we have, we can help 90% of the people, we can save a lot of money on costs. And they decided to automate the process of mortgage lending. They went after the W-2 employee and they realized and they knew that the business owner was gonna fall through the cracks, but they didn't care because they added the numbers and they realized that they would make so much money automating the process for W-2 employees.
They took a very peculiar and I would say niche product, which was giving a loan to a W-2 employee and they made it the product. This is terrible in my opinion. I'll tell you why. Because the regulations, the laws, everything that took in congress, everything that is out there supposedly to regulate the lending market takes into account and assumes falsely, in my opinion, and that the W-2 employee loan is the standard by which all of other loans have to behave or have to abide by. So now you have a very niche, very specific, very particular kind of loan that is the yardstick by which everything else is measured. And that's why everyone else that is not a W-2 employee has a hard time qualifying because a loan is more than 50% rules. You would think that because you make money, because you have a healthy income, because your credit is not too bad, because you pay your bills on time.
You would think that all that would easily qualify you to get a loan. And then you go and apply for a loan and you get all of these rules. All of these rules supposedly are to be able to help the institution, the lending institution select the qualified borrower. But many of these rules are in conflict with each other, especially when you apply them to the self-employed individual. And now you get the opposite result, you get the result that a very well qualified person that can afford a home is basically not qualified. And the nightmare begins because it's not a question about common sense. It's not a question about whether you make or not make the money. It's a question about whether or not you can follow these rules. It's how you package the mortgage, it's what information you present. So we'll go through this funnel of rules and at the end of it you are going to get a mortgage.
Ty Crandall: You know, it's interesting, I was just doing a live stream before this and this is exactly what I talked about was, in business lending, the number one thing lenders care about is, will you, can you pay them back, the likelihood you'll pay them back, right? And what you're talking about defies conventional logic when it comes to lending because you have somebody that can prove they have the money, they have great credit, they have everything that clearly shows that they are a low risk and yet they're still considered to be a high risk or even completely ignored in the actual mortgage market. So what is it that really creates the problem? Is it that their standardized system requires pay stubs, W-2's, and we don't have it because we're self-employed? What is the problem where we don't fit into their cookie-cutter rules?
Alejandro Szita: I will give you an example that before this podcast, I was addressing this morning with a bank executive. We have a borrower that we're working on, he makes about a million dollars a year. His company sells about 20 million dollars in income. However, because of the profile of this borrower, we decided to use tax returns. Usually for self-employed borrowers, we don't use tax returns because once you use a tax return, you are invoking a set of rules by which most self-employed people would not qualify. But in the case of this particular borrower, because he's so strong, we decided to use the bank statement product to give them the cheapest possible rate that we can get away with. So here you have a person that can, not only can afford a mortgage, he could afford 10 or 12 mortgages. And you would be surprised, the lending institution takes the tax return of the person, they go over each line by line and they start to disallow income, regular income.
Why? Because the income was not reported in the line that they were expecting it to be reported. So you go, well that's just the technicality. I mean the person did make the money. Yes and no because to them this is more than a technicality. If the income is on line one or is in line ten, its difference of whether or not they can count the income or not. So I'll give you an example. In his case, his corporate return is huge, but because some of the income is on line ten, they're disallowing it because some of the expenses are not reported on the correct way, they're disallowing it. Now when I talked to his CPA and I asked the CPA, why did you do this? The CPA gives me a business reason and an accounting reason that makes sense. But this business reason and this accounting reason is now in conflict with the lender's reason and therefore you have a huge amount of income that is disallowed. Because it is disallowed, now this well-qualified borrower that makes a lot of money suddenly doesn't make enough money to qualify for the mortgage. So this is just one example of what happens. This happens a lot on the income side and it happens a lot on the credit side. You have a borrower that is paying his bills on time and you run the credit report and then his mid FICO, it's a little lower. And the person is always surprised, why is my FICO so low? I pay my bills on time. Isn't that enough for me to get a high credit score? And the answer is no, because the credit score does not reflect your ability to pay. It reflects your ability to manage debt according to very specific and arbitrary parameters established by the bond holders that control the money. Most people don't realize that and I didn't realize that either. The FICO is not a measure of your success, it's a measure of you managing money, way that was decided that makes the most money for the bond holders.
Ty Crandall: Okay, so back to your point and I love it. Go ahead. No, go ahead.
Alejandro Szita: Having said all that, you know I'm just describing the problem. I don't wanna spend too much time.
Ty Crandall: No, you're describing the solution. I was gonna have to dig it out of you.
Alejandro Szita: Yeah, exactly. So I wanna talk a little bit about the solution too. But what are, just to summarize the problem, the problem is this, you have rules that were made for W-2 employees. These rules collide with the lifestyle and collide with the way business people make money because business people make money by cash flow. You get a big windfall, then you might get a throw, and you manage your money by cash flow. Managing the money by cash flow means that your income is not stable month to month and it means that you pay your bill selectively depending on the return on investment that you can get on your money. If it's not convenient to you as an entrepreneur to pay you a bill, even if you have to incur a late fee, you're not gonna pay it because you can put your money somewhere else and double it.
So that way of operating puts the business people or self-employed people on a collision course with the rules established for a W-2 employee. And that's why the business person does not qualify when it comes to the traditional mortgage. Now having said all of this, there are plenty of lenders that have made their business to lend to self-employed people. The thing is that those lenders are hard to find because a self-employed borrower is usually defined as a non-QM or non-qualifying mortgage. And it's not because he doesn't qualify this non-QM verbiage. It's from the viewpoint of the people that made the rules for the W-2 employee. So you have, those loans take more time. And you will find that many lenders and mortgage brokers don't wanna put in the extra time that it takes to do them. So that is the number one problem. But there are plenty of programs, and there are plenty of lenders, and there are plenty of mortgage brokers. I mean it's a small minority overall, but those things exist out there.
Ty Crandall: So when is there a time that we should consider using tax returns and not? Like, not for us to figure out, but from your perception, like when do you look at a borrower and say tax returns make sense versus not make sense as an entrepreneur?
Alejandro Szita: Usually what I do, I listen to the motivation and I listen to the story behind the borrower. After half an hour or twenty minutes listening to this, I, already in my mind, I build up the loan and I can see whether or not we can use tax returns. Look, we use a completely different approach. Instead of bombarding you with informational requests at the beginning, I don't ask you for anything, I just want to listen to you. I just want to listen to what you want to do. The house that you want to buy or refinance or whatever it may be. What are your resources and what you do for a living? That immediately will tell me what loan, what lender, what program. Based on that I just ask a few questions. Just send me one statement, send me one tax return just to get a feeling of the documentation that you have. And only with that we can build a whole long scenario. Once you decide, yes, this is for me, this is when I give you the whole list of stuff that you need to send me.
Ty Crandall: So with that being said, what are some of the solutions? I'm an entrepreneur, I'm self-employed, I don't have W-2's, in a normal situation. Or in my case, here's another situation, right? Either start as a 1099 or the business gets too big to do that and then I still get W-2, but then part of my money comes through bonuses, distribution, stuff like that. That doesn't, that isn't on my W-2. Regardless of the situation. These are pretty typical of where we are as entrepreneurs. What are some other options where I can still qualify? Is there still hope? What are some alternatives to using tax returns?
Alejandro Szita: For example, because most self-employed people work on cash flow, we can use your bank statements, we can use your personal and/or business bank statements. We can use either or both. That's not a problem. We can use your assets if you have substantial assets. Some people do have substantial assets even though they have no income, we can use that. We had the extreme case and this is a loan that we're doing right now, a very successful financial advisor, for 15 years working for an international company. In March of this year he decided to go 1099 and then he came to us for a loan. But this person makes about half a million dollars a year and this person is very well-off. Can you imagine that technically he did not qualify for anything? And I will tell you why. We found him a loan and I'll tell you the loan that we found him, but he did not qualify for anything because since he ceased to be a W2 employee in March, everything that had to do with W-2 employees or any program that was made for a W-2 employee was out of his reach because he began to be independent. By the way, he's working for the same company and doing the same job except that instead of a W-2 employee, now the company pays him as a 1099 business owner. So it's the same company, same job, and even more money. He's getting more money now, but because he began in March, he doesn't have two years of history as a business owner. So now he also does not qualify for any program.
Ty Crandall: Even though he's from the same company. But he went from W-2 to 1099 and they're re-seasoning him as a new employee.
Alejandro Szita: Exactly. So no program for self-employed, he will qualify for. No program as an employee he will qualify for. And let me tell you something else that you're gonna laugh. He's putting 40% down on his purchase.
Ty Crandall: Oh my gosh.
Alejandro Szita: 40% down and his mid FICO is over 700.
Ty Crandall: That is ridiculous. It's like it defies all logic. It doesn't even make any sense.
Alejandro Szita: It defies all logic. So, technically he doesn't qualify for anything. So this is what we did. I know of a bank in New York that there is a program that is called, it's a community, a community mortgage. A community mortgage is done for the unbanked. It's for people that don't have a bank account. It's for people that maybe are foreign and they have, they are successful in terms of cash. They have a lot of cash, they may have good credit, but they are like sort of, and they call them the unbanked, people that don't have sometimes enough education to have a bank account. This is why this program was designed. You as a lender need to receive a special classification from the treasury, from the US Treasury in order to even be able to have this program. And this is the funny part, because this program is done for the financially illiterate, however successful, I'm not saying that they are. These are the guidelines of the program. You have to pay 75 bucks and you have to do a financial literacy course in order to qualify. Now here we have a financial advisor, a successful financial advisor for 15, 14 years who makes a shitload of money. Excellent credit. Putting 40% down. Doesn't qualify for anything. He has to go to the unbanked program, by the way, he has like 20 bank accounts. He has to go to the unbanked program because that's his only solution. And sure enough we got him approved as an unbanked person in order to do this loan. So that tells you right away that logic and lending guidelines don't make any sense and they often clash. And this is what I see over and over again. Successful business people are disheartened, frustrated, and it simply does not make any sense because it doesn't.
Ty Crandall: So let's say I own a hundred percent of my business and I wanna prove income with business bank savings. Is there a typical percentage of my deposits I'll look at to count as my income?
Alejandro Szita: This is a very good question. We used to do this manually until we found this artificial intelligence system where you give us all of your bank statements, we feed it into the system and it takes about three minutes, the system spits out everything. How much money you make, how much money are you expected to make, how many checks did you get, how many deposits, how many bounced payments, all and all. You have like 60 or 70 variables, but we only use two, which is your income. So by looking at your bank statements, now using the system, we can within three minutes qualify you for a mortgage.
Ty Crandall: Wow, that's really cool. So then the tech now does a lot of that for you to be able to get an idea. What kind of debt ratios are lenders looking at, debt to income ratios?
Alejandro Szita: Usually for the self-employed person you can go up to 45%, but we personally, I personally underwrite all our loans at 43%. Why? Because of the loan journey, even if they conditionally approve you, other things are gonna come up. So I want to have a little bit of a safety margin. So I would say about 43, we can go all the way up to 45, but I would say about 43. If you are a regular W-2 employee because we do W2 employee loans, and you are buying like a conforming, I mean your loan is quote-unquote a conforming loan. Again, all these words, conforming, non-QM, all of these words don't mean anything. These are classifications made by the people that created the rules for the W-2 employee. So I just wanna make that very clear because I don't want people to be confused. But the so-called conforming, you do, if you are a W-2 employee and you do a so-called conforming loan, we can go up to almost 50% debt to income ratio. But for the regular business owner, it's about 43%.
Ty Crandall: Okay. And that makes perfect sense. What about down payment? Like in these scenarios, What kind, because I'm a veteran, right? So VA loan, typically if I fit their rules I can get a hundred percent financing. Now thanks to Trump, I don't, I can buy like a million dollar property and still get a hundred percent financing if I can prove my income, I think. And FHA requires like two and a half, 3% down, something like that. So very low down payment. If we fit the rules in some cases, a conventional mortgage, maybe 80% loan to value, I think you could speak to that. But what kind of loan to value can we expect? What kind of down payment? If we're a business owner, we need one of these alternative ways of verifying your income. What kind of loan to value roughly can we maybe expect to get?
Alejandro Szita: All of these things have to be in balance. You have down payment, you have credit, you have income, and you have the value of the collateral. All of these things have to be in balance. Whenever you imbalance one of them, you have to compensate with the others. I'll give you an example. If you want to put very little down payment, that by itself won't work, it will work only if you balance it by having a higher income, having a higher credit score. If you say my credit score is not that good, okay, now we have to overcompensate either on the down payment, either on the income or either on the collateral. So every time you change these things that are imbalanced and you push them up or down, you have to compensate with the others. Now for the business owners, for a business owner that were not gonna use tax returns, realistically speaking, realistically speaking, you cannot come up with less than 10%.
A 10% will be a tough sale. Really to sale through the loan. As a business owner, I would recommend that you at least come up with 15%. Not that we cannot do the 10% loan, but it's gonna be very expensive because again, 10% on the world of self-employed is considered very small. Because it's very small, now we have to overcompensate. And the way the lenders overcompensate is with higher income and with a higher rate. Now usually from what I've seen, most of our self-employed loans, the business owner puts 20% or more. If you put 20% or more, you don't have to worry about a bunch of things, one of them being mortgage insurance. But to answer your question, I would say minimum 10%, realistically 15%. If you are a W-2 employee, you can get away with 5%, if you go the FHA route, 3.5%.
But again, once you cross this 5% threshold and start to pay less, your mortgage becomes extremely expensive because that little difference between 3.5% and 5% is gonna cost you a fortune. It's gonna cost you a fortune on your monthly payment and it's gonna cost you a fortune on closing costs. So most people that we deal with, between three and a half and five, they can put five or more. So we always say at least put 5%, you're gonna save yourself a bundle in terms of payment and closing costs. But most of our W-2 employees by the way, loans, the minimum that I've seen mostly is 10%.
Ty Crandall: You hit on a very important factor I talk about all the time and it's called compensating factors. And I tell people about compensating factors all the time when it comes to lending. And you described it well, right? I mean, you know, there's all these strengths and if you have strengths it can offset the weakness. So if your weaknesses can't prove income and you have strength like good credit, then that helps offset the weakness. If your credit's bad and you can't prove income and these things start stacking up, then it hurts you. From what you do, what are compensating factors like? What are some examples? Like I know one is a larger down payment, another as you mentioned is credit score. What are some other factors that contribute to help compensate for us being self-employed and having a harder time proving.
Alejandro Szita: Buying something that you can comfortably afford. So if your income allows you to pay a $10,000 a month mortgage and you go for a $6,000 a month mortgage, that's more than a compensating factor. Because really a mortgage, the mortgage payment, you are leveraging your income. So you can go all the way and leverage it to the max or just leverage it to a point that you are comfortable with. So a compensating factor is your income. Usually for self-employed people it's income and it's assets. That's what I've seen.
Ty Crandall: How do you know what lenders? You're really good. You're in California, Southern California and you're talking about lenders in New York. How do you figure this stuff out? There's such a small, there's thousands and thousands. Thousands of lenders out there. How do you figure out these ones that will do these unique niche programs that work for your clients when so many others came?
Alejandro Szita: At the beginning when I started in this business, I didn't know. So I started to call lenders like crazy. I called and I called and I called and I called. Now that I'm in the industry and that I know a lot of people, I get them by referral. Like this loan scenario we were discussing the gentleman who can really qualify because he's a newly1099 employee and he's not a W-2 employee, now he doesn't qualify for anything. I called the bank in New York and I said, hey, I have somebody to send you. And they said, you know, Alejandro, I'm sorry we don't do it anymore. We lost the US treasury classification, but there is someone somewhere else in southern California that does it. They did not remember. Calling another friend that I have at another lending institution in San Diego, he said, you should try these people because they do it. And that's how I've been finding these people. That's how I've been finding them. It's a trial and error. It's trying to get a relationship with them and it's word of mouth within the lending industry. That's how I usually find them.
Ty Crandall: Can you lend, help people all over the country or where is your area of borrowers need to be from for you to help?
Alejandro Szita: We're licensed in California, in Florida. And now we are applying to get a license in the southern states. Meaning Alabama, Georgia, Tennessee. And I believe there is one more that I don't remember. So we are gonna end up being licensed in Florida, Alabama, Georgia, Tennessee, and California.
Ty Crandall: If people were listening or watching and are not in one of those states, what's your advice for being able to find someone as brilliant as you to be able to help them If they're from Indiana where I'm originally from?
Alejandro Szita: Well, if you have a business loan, business loan being defined as you're buying a property that you're not gonna live in it, we can still do the loan on another state. There are only like three or four states where we can't because even to make a business loan, we have to be licensed. One of them is Oregon. I forgot the other ones. But if it's a non, what they call a non-primary residence, meaning you're gonna buy it to rent, you're gonna buy it to make some kind of money, or you're going to buy it and you're not gonna live in in it, we can still help you. However, if you are on those states like Oregon, where there is nothing that we can't help you, then what I recommend is, calling different mortgage brokers and call the ones that they say that they specialize on the quote-unquote non-QM. And again, non-QM means non-qualified mortgage, but this term non-qualified mortgage does not mean that you're not qualified. It means that the mortgage does not follow the rules of the W-2 employee.
Ty Crandall: Alejandro, where can everybody go to be able to learn more about you, learn more about what you do and learn more about being a self-employed borrower that's trying to get a loan?
Alejandro Szita: The first thing is, the best way is to go to our website, which is www.prosperitylending.us. Prosperity, like something prosperous, prosperitylending.us or write me an email, write me at info@prosperitylending.us. That is the best way.
Ty Crandall: Prosperitylending.us. Okay, perfect. Thank you so much for coming on with us today. I really appreciate you sharing and helping a lot of us overcome one of our biggest concerns, which is like being able to own a business and still be able to get a home loan. So thank you so much.
Alejandro Szita: Thank you, Ty. Thank you for having me on your show.
Ty Crandall: All right, so listen, if you are listening and watching this, let me just say you are nuts if you even think about going into a bank and getting a mortgage. Period. I don't even care if you could prove your income. It's ridiculous. Loan brokers and what I've learned in two decades, get money, find a loan broker. And the reason for that is, is that loan brokers, if you could go in your bank, they could typically get better rates in your banks can get you anyways. And if you can't go and get financing to a bank, if you're not in this cookie-cutter scenario, then brokers are just, especially a really good one like what we found here with Alejandro, they can do things that will make bankers' heads spin. Like they don't even understand how it's done. I know, I lived in that industry and like Alejandro said, I would spend late, late nights finding, calling bank after bank after banks, sometimes a hundred banks to find a solution for one person and then build relationships with these banks to get deals done that typically wouldn't get done.
Ty Crandall: You are just shooting yourself to the foot. If you don't work with a good broker, especially if you are running a business, you're self-employed. You're not gonna have the normal income verification, you're not gonna fit in the cookie cutter scenarios. A lot of people may even tell you don't even qualify for a home loan. And what you've learned today is absolutely you can. As a matter of fact, for almost any of these unique scenarios, there is a solution, there are lenders that can help you and somebody like Alejandro is the one that connects that, that bridges that gap between you as the borrower and going out and finding that solution that could work for you. So here's what you wanna do. Go to prosperitylending.us, prosperitylending.us, and that takes it to Alejandro's website. And there's a ton of cool stuff in here. There you can read about the services, but you can also access their resources, guides, podcast, interviews, his book, as well as a blog that answers a lot of the common questions that we have.
So even if you're not ready for a mortgage now, you wanna go to prosperitylending.us and you wanna bookmark, you wanna save it, you want to create a file. However you save things for when you are ready for a mortgage, you know to come back here and give him a call. Even if you don't think they can help you in a particular state, give Alejandro a call. Because I bet you even if he can't, he still could probably give you guidance on where to go to find a solution. Even if he can't help you, he probably can't help you where you are. So go to prosperitylending.us. This is the golden ticket for you to be able to get a home loan as a self-employed borrower. Thank you very much for tuning in and make sure you check it out. This website's awesome. And Alejandro, by the way, that's a really good picture of you too. I love the picture. So everybody else, check out Alejandro's picture right here on the page. And also make sure you check out the resources there as well so you can get yourself set up to get the home of your dreams, to also match the business of your dreams that you're building. Thanks for tuning in. Make sure you visit prosperitylending.us. Have a great day.
