Mortgages for self-employed borrowers are easier to get than they’ve been since the Great Recession. So if you tried unsuccessfully for financing in the past, this might be your year.
Self-employed underwriting guidelines are easier
Self-employed mortgage guidelines are looser. If your application qualifies for automated underwriting, you may now be able to get a self-employed mortgage with just one year of tax returns.
And if you’re self-employed but only using the income from your “day job” to qualify, lenders may not need your self-employment financials, and losses from your business may not be held against you.
Getting a mortgage when you’re self-employed involves a few steps, but they aren’t too difficult.
For a conforming loan, one that “conforms” to guidelines established by Fannie Mae and Freddie Mac, you can apply in-person, online, or by telephone. Usually, the loan officer or processor inputs your information into an automated underwriting system (AUS). You almost never have to fill out forms. Just read and sign.
You must supply income documentation (usually tax returns and sometimes financial statements) and provide copies of your business/savings/retirement/investment account statements. You need to list your debts, and your lender will check your credit.
How automated systems underwrite self-employed applications
AUS is great for getting a decision in minutes. It approves, declines, or refers your application to a human underwriter for clarification.
Next, a human underwriter reviews your documents to make sure that they match the information on your application.
For instance, if you indicate that you earn $5,000 a month, your tax returns should match that. And your bank statement balances should match your application.
If the file gets a “refer” recommendation, your application goes into manual underwriting. In that case, guidelines become a little stricter. You are likely to need two years of tax returns, for instance.
Most lenders want taxable income only
What often derails self-employed applicants is that they might say they earn $5,000 a month, but their taxable income might only be $3,000 a month.
That’s because qualifying income is different from your gross income. Underwriters normally take your taxable income and add back expenses that you deduct but that don’t actually require you to spend money—like depreciation and depletion. They might also add back an “extraordinary” loss if you can prove that it won’t occur again—for instance, a fire or theft.
But underwriters also subtract “extraordinary” or “windfall” income that’s unlikely to recur. To use income for qualifying, it must be stable and ongoing.
Debts and assets
Lenders check your bank statements to make sure that your down payment comes from an acceptable source (not a loan or someone who will benefit from the transaction, like the seller). And they don’t want your purchase to clean out your business account and put your income in jeopardy. So you need the down payment and closing costs to come from your personal funds.
Lenders will also be on the lookout for undisclosed loans. For example, if your bank statements show unusually large deposits within the last 60 days, the underwriting team may ask you to document the source of those funds.
You may have to provide your business license or a statement from your accountant indicating that your enterprise is financially sound.
Documentation for most self-employed mortgages
If you’re self-employed, gather these documents for lenders:
- Two years of personal tax returns
- Two years of business tax returns including schedules K-1, 1120, and/or 1120S
- Business license
- Year-to-date profit and loss statement
- Balance sheet
- Signed accountant letter stating you are still in business
Tax and accounting professionals are used to getting these requests for mortgage applications. Your accountant may even be able to email you all your required documentation the same day.
Income consistency is important
Income cannot usually be counted in a mortgage application unless you can show that it’s “stable, consistent, and ongoing.”
However, many businesses have established patterns of up and down years. A home developer initiating a new project might take a loss one year because it’s all expenses and no sales.
But the following year, the houses sell and income soars. If you apply for a loan during the “down” year, you’ll have to prove to the lender that your business is healthy and that this is a normal pattern. You can help your cause by supplying three to five years of taxes and a statement from your accountant.
You must be able to explain decreases in income when you apply for a mortgage as a self-employed borrower.
Alternative loans for self-employed borrowers
Self-employed mortgages became much harder to get when stated income options disappeared from mortgage lending. These loans are no longer legal.
However, the law requires lenders to document income. Documentation may go beyond tax returns.
New products are taking the market by storm. They’re often called “bank statement” mortgages.
Under these guidelines, borrowers show 24 months of business and/or personal bank statements. Lenders estimate your income from the average amounts that are moving through your bank accounts each month.
Note that these programs usually come with higher mortgage rates.
Whether you qualify for a mainstream loan under less-restrictive guidelines, or using a new, alternative bank statement, getting a mortgage when you’re self-employed is easier today than it’s been in many years.