Getting a home loan can be a challenge for self-employed people: A typical mortgage lender wants to see one job with steady month-over-month income.
But an independent contractor might have time off between jobs, varying amounts of income each pay period, and business income that looks low because of capital investments, which are common tax write-offs for the self-employed. This often means they can’t qualify for a traditional home loan, even though they’re earning enough to afford it.
In fact, about one in four borrowers see their traditional purchase loan applications rejected in areas like Dallas and Travis counties, where self-employment is roughly 30 percent, according to Zillow. Around the rest of Texas, the chances of being rejected can be even higher for well-qualified borrowers, including small business owners, freelancers, entrepreneurs, and self-employed borrowers.
“It’s not that they aren’t financially capable of buying a home—it’s that they’re up against a traditional lending system that hasn’t adapted to a changing workforce,” said Michael Slavin, CEO of online mortgage lender Privlo, which rolled out its services in Texas Friday, one of nine states in which it is currently doing business.
“We underwrite each borrower and are able to tailor the loans,” Slavin said. “We’re using technology to be a lot more flexible because we deal with the exceptions to all the lending rules.”
Because of those exceptions, Privlo considers many more data points beyond the typical W2 used by traditional banks and institutions to assess a borrower’s creditworthiness, like tax returns and bank statements.
“I see homebuyers with great income and great credit get rejected all the time just because they don’t have a cookie-cutter 9-to-5 job,” said April McGowan of Keller Williams Realty in Dallas, who has been working with Privlo for the past few months. “I’m referring more and more of my clients to Privlo, who are actually able to close on mortgage loans that banks categorically reject—it’s helping bring balance to the system and helping real estate professionals bring new buyers into the market.”
Privlo’s Chief Credit and Product Officer Saro Vasudevan estimates around 25 percent of high-quality borrowers are unable to get loans in Texas. Privlo is able to work with to these kinds of people because they are backed by private investors, not government capital, and are therefore federally unregulated. Privlo venture capital investors include Spark Capital (Twitter, Tumblr, Foursquare, Oculus) and QED Investors (Credit Karma, Braintree and Prosper).
Slavin got the idea for Privlo from his years of work in private equity and later real estate, where he was building condos in Los Angeles and noticed a strange phenomenon.
“A lot of people working in the Hollywood industry have [money] in the bank, but work eight months of the year, and they can’t get a home loan even though they have good credit,” Slavin said. “These were extremely qualified borrowers who were unable to get traditional loans.”
Slavin started the company in California in 2011, and they now focus on the self-employed, retirees with significant assets who may be lacking regular income, credit rebuilders who have a single negative credit event, and those with a limited credit history, like foreign nationals with work visas and younger borrowers.
Following their initial soft launch, Privlo’s team has spent the past several months working with local Realtors, opening an office in Austin, and refining their process to cater more to Texas’ growing self-employed population.
The company plans to expand into 21 states by the end of 2015, which represents more than 90 percent of the American housing market.
