Plain-English definitions of the terms you'll meet when you qualify for a home loan on bank statements, 1099s, a P&L or assets instead of tax returns. Each definition explains the mechanics and links to the program page or guide that covers it in depth.
Written by Tanner Cook, NMLS #2090424 · Updated
1099 income is pay an independent contractor receives from clients who report it to the IRS on Form 1099-NEC, or on Form 1099-K for card and payment-app payments, instead of on a W-2. Most 1099-only programs start from your gross 1099 earnings and subtract a fixed expense factor (commonly 10%); some investors use a different factor.
The ability-to-repay (ATR) rule is the federal requirement in 12 CFR 1026.43 that a lender make a reasonable, good-faith determination, before the loan closes, that you can repay it. It applies to non-QM loans too: alternative documentation changes how your income is verified, not whether it is.
Add-backs are deductions on your tax return that a conventional underwriter adds back to your income because they don’t cost you cash each year. For Schedule C income, Fannie Mae requires recurring depreciation, depletion, business use of a home, amortization and casualty losses to be added back (Selling Guide B3-3.6-03).
Alternative documentation, or alt doc, means proving income with records other than tax returns and W-2s, such as bank statements, a P&L, 1099s, a written verification of employment, or assets. It is how non-QM programs qualify self-employed borrowers whose tax returns understate what they earn.
Asset depletion is a way to qualify on savings and investments instead of a paycheck. Eligible assets are each counted at the share the investor allows, the funds you need to close and any required reserves are subtracted, and the rest is divided by the investor’s set number of months (often 60). Fannie Mae’s version for employment-related assets divides by the months in the loan’s amortization term (Selling Guide B3-3.4-06).
A bank statement loan is a non-QM mortgage for self-employed borrowers that documents income with 12 or 24 months of personal or business bank statements instead of tax returns. The lender totals eligible deposits, removes transfers and other non-income deposits, applies an expense factor to business accounts, and averages the result into monthly qualifying income.
A CPA letter is a signed letter from your certified public accountant, or another licensed tax professional the investor accepts, that confirms facts underwriting needs, such as how long the business has operated, your ownership share or the business’s actual expense ratio. What the letter must say, and who may sign it, varies by investor.
Debt-to-income ratio (DTI) is all your monthly debt payments divided by your gross monthly income, one measure lenders use to judge your ability to repay. On a non-QM loan the income side is your qualifying income from deposits, a P&L, 1099s or assets, and the investor sets the maximum ratio.
A DSCR (debt service coverage ratio) loan qualifies an investment property on the rent it brings in compared with its monthly housing costs, instead of on your personal income. We cover DSCR loans on our sister site, savemydscrloan.com.
An expense factor is the percentage of business deposits a bank statement loan treats as business costs rather than income. Investors set it: business statements often use a fixed factor (commonly 50%) or a lower ratio supported by a letter from your CPA or tax preparer, and personal statements generally use none.
The Fannie Mae Selling Guide is the rulebook lenders follow to make conventional loans that Fannie Mae will buy, including how a self-employed borrower’s income is documented and analyzed (B3-3.5-01). Non-QM loans are made outside these rules, which is why they can use bank statements, a P&L or assets instead of tax returns.
A foreign national loan is a non-QM mortgage that finances a U.S. second home or investment property for a buyer who lives abroad and has no U.S. credit, green card or Social Security number. Instead of a U.S. credit report, the lender relies on an accountant’s letter from your home country, a bank reference letter and verified funds.
Form 1084 is Fannie Mae’s Cash Flow Analysis worksheet. For a conventional loan, the lender uses it, or another form that applies the same principles, to turn a self-employed borrower’s tax returns into qualifying income, starting from the income reported and adding back certain non-cash deductions (Selling Guide B3-3.5-01).
Form 4506-C is the IRS form a lender uses to order transcripts of your tax returns, so it can confirm the returns you provided match what you filed. Because bank statement loans don’t use tax returns, they generally don’t require a 4506-C.
Gross vs. net income is the difference between what your business takes in and what is left after expenses and write-offs. Conventional loans qualify self-employed borrowers on net income from tax returns, with add-backs, while bank statement and 1099 programs start from gross deposits or gross 1099 earnings and subtract an expense factor instead.
An investor, in non-QM lending, is the company whose guidelines a loan is written to and that buys or funds it. Investors set details such as the expense factor, the statement period, the share of each asset counted and reserve requirements, which is why the same file can get different answers from different investors.
An ITIN (Individual Taxpayer Identification Number) is a 9-digit number the IRS issues to people who need a U.S. taxpayer identification number for federal tax purposes but aren’t eligible for a Social Security number. An ITIN loan is a non-QM mortgage for those tax filers, commonly documented with bank statements or 1099s.
LLC and S-corp income is what you earn from a business organized as a limited liability company or an S corporation. A conventional loan analyzes it from business tax returns and Schedule K-1s; a bank statement loan documents it from business deposits, after the expense factor and your ownership share.
NMLS is the licensing system state regulators use to license mortgage companies and loan originators. Every licensed company and loan originator has an NMLS ID you can look up on NMLS Consumer Access: Tanner Cook is NMLS #2090424, Zac Cook is NMLS #2111496, and Cornerstone First Mortgage, LLC is NMLS #173855.
A non-QM (non-qualified mortgage) loan is a mortgage made outside the Qualified Mortgage rules that most conventional and government-backed loans follow. Non-QM programs can document income with bank statements, a P&L, 1099s or assets instead of tax returns, and the lender must still make an ability-to-repay determination.
A non-warrantable condo is a unit in a condo project that doesn’t meet the project standards conventional lenders follow, for example because of pending litigation, one owner holding too many units, or too much commercial space (Fannie Mae Selling Guide B4-2.1-03). Conventional financing usually isn’t available for these units, but some non-QM programs allow them.
NSF (non-sufficient funds) and overdraft items show that a payment bounced or an account went negative. On a bank statement loan, investors set how many they accept in the statement period and usually ask for a letter of explanation, because a pattern of them suggests cash flow is tighter than the deposits imply.
Ownership share is the percentage of a business you own. On business bank statement and P&L-only loans, qualifying income is usually counted in proportion to your share, and investors set a minimum share you must own to use business bank statements. Fannie Mae treats anyone with a 25% or greater ownership interest as self-employed (Selling Guide B3-3.5-01).
A profit and loss statement (P&L) is a summary of a business’s revenue, expenses and net profit for a period. A P&L-only loan qualifies a business owner on a 12-month P&L prepared by a CPA or licensed tax preparer; qualifying income is generally net profit times your ownership share, for primary residences, second homes and investment properties, depending on the investor.
A Qualified Mortgage (QM) is a loan that meets CFPB requirements, such as no interest-only period, no negative amortization and, in most cases, no balloon payment, so the lender is presumed to have followed the ability-to-repay rule. FHA, VA and USDA loans count as QMs; conventional and jumbo loans must meet the requirements.
Qualifying income is the monthly income figure a lender uses to underwrite your loan, after its documentation rules, expense factors and averaging are applied. For self-employed borrowers it is usually lower than gross deposits or revenue, and it is the income side of your debt-to-income ratio.
Reserves are the money you still have after closing, measured in months of the new home’s monthly housing payment, including principal, interest, taxes, insurance and dues. Fannie Mae counts liquid or near-liquid assets you could draw on (Selling Guide B3-4.1-01); non-QM investors set their own reserve requirements.
Seasoning is how long money has been in your accounts, or how long ago a credit event happened, before a lender relies on it. Asset-based programs typically want a couple of months of statements showing the funds are yours and stable, and large recent deposits usually need to be sourced.
A self-employed borrower, in Fannie Mae’s definition, is anyone with a 25% or greater ownership interest in a business (Selling Guide B3-3.5-01). Sole proprietors, independent contractors, partners and owners of LLCs and S corporations commonly fall in this group.
Sourcing is documenting where a deposit came from. Underwriters ask you to source large or unusual deposits so that loans, transfers or gifts aren’t counted as income or as your own funds.
The statement period is the number of months of bank statements a lender averages, usually 12 or 24 on bank statement programs, or 3 when a profit-and-loss statement from a licensed tax professional carries the income. A 12-month period reflects your most recent year; a 24-month period averages two years, which smooths out ups and downs.
A written verification of employment (WVOE) is a form your employer completes to certify your job title, start date and pay. A WVOE loan uses it in place of paystubs, W-2s and tax returns, and the employer must be arm’s-length, so people paid by their own company need a bank statement or P&L loan.
Answer a few questions about how you earn and we'll point you to the documentation path most likely to fit, or estimate your qualifying income first.
Tanner & Zac Cook NMLS #2090424 / #2111496Cornerstone First Mortgage, LLC NMLS #1738554.89 · 45 reviews of Tanner Cook on Experience.comDefinitions are general education, not loan advice or a commitment to lend. Guidelines vary by investor and are subject to change without notice. All loans are subject to underwriting approval and an ability-to-repay determination.
Tanner Cook, NMLS #2090424 | Zac Cook, NMLS #2111496
Cornerstone First Mortgage, LLC, NMLS #173855