When my wife and I discovered our dream home in the Pacific Northwest, we knew practically nothing about buying a house. Any first-time homebuyer will attest to the chaotic roller coaster ride that begins with the loan application, lurches forward with a mountain of required documentation, and ends with new house keys in hand 30 days later. That is, if everything goes according to plan, and that’s a rare thing.
In many ways, we were lucky. Our house was the only one for sale in the entire town — move-in ready with plenty of curb appeal. Our realtor, Shanon Frame, convinced the seller to accept our first offer in a red-hot market when buyers elsewhere were offering thousands over listing price, sight unseen. We were even able to negotiate with the seller on a washer, dryer, and small repairs.
What impressed us most was our loan officer. Paul Adams’ team at PrimeLending ably and accurately walked us through every part of the process, squeaking us into our new home just before interest rates began to climb in 2021. If there was a request for further information, another e-signature required, or any other vital update, they'd call us, weekdays, weekends, morning, noon, or night. When a malware attack froze all the computers at the title company just two days from closing, Paul rang their office phones every hour for status updates. In the time between application and closing, we’re fairly convinced nobody on Paul's team got a full night’s sleep. And to think: ours was just one of many loans they were closing that same month!
Even with the unexpected hiccups, our application and approval process were fairly straightforward. That year, my wife and I were among the more than 80% of Form 1040 filers who reported W2 earnings. Loan officers love boring borrowers like us. The data entry work is uncomplicated. A few W2s and pay stubs are usually sufficient to calculate household income and determine a loan amount.
How does this experience differ for applicants whose earnings are more complex? People who are self-employed or supplement their W2 earnings with 1099 earnings (hailing all Uber drivers!) may encounter a more complicated loan approval process. Applicants with various cash flows — business owners, real estate investors, seasonal employees, gig workers — may need to submit significantly more documentation than a W2 applicant. How to calculate the earnings of an applicant who is one of several business partners named on an 1120-S? How to determine the average annual cash flow for a small business owner who is investing in growing their business? Complications like this can slow, stymie, and sometimes sink the loan approval.
Worse yet, a self-employed applicant may not receive the full loan amount to which they are entitled, even if they submit all the documentation required to prove consistent income. All that extra paperwork increases the potential for human error, especially considering that loan officers operate on white-knuckle mode seven days a week. They or their administrative or underwriting staff may overlook add-backs; that is, opportunities to increase the applicant’s reported income and therefore award a higher loan amount. Consider too that high-income filers in the U.S. (think: six- to seven-figure earnings) generate roughly 45% of their income¹ from self-employment. By overlooking those opportunities, a loan officer may inadvertently exclude clients from higher loan amounts, effectively shutting the door on their dream home.
Baleen helps lenders crack that door wide open, maximizing loans for their borrowers and commissions for themselves. A recent review¹ of IRS statistics on tax filings from S-Corps and Partnerships showed that, on average, counting add-backs increases cash flow by 2-3 times the reported income. Baleen’s proprietary technology is built to convert these complex tax structures into clear cash flows.
And, by replacing manual data entry with advanced automated data extraction from uploaded tax forms, lenders mitigate human-in-the loop errors and have more time to focus on growing their business. Leveling the playing field can make qualifying self-employed income as easy as W2 income.
Over the last three years, my wife and I invested a great deal in our house: a new dishwasher, fence repairs, and many gallons of paint. It’s been worthwhile. After all, it’s our dream home.
Lenders should also consider worthwhile investments that can broaden their customer base and build their business. Baleen Solutions provides the tools to make that happen.
¹ Data compiled from IRS SOI reporting database https://www.irs.gov/statistics.
Sam Campeau blogs about all things pertaining to finance and technology for Baleen Solutions. In his free time, he watches the whales swim from his tiny fishing town in the Pacific Northwest.
Comments