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Self Employed Mortgages

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Self Employed Mortgages

Bank Statement Loans are only for self employed borrowers. They are ideal because while most self employed borrowers earn a solid income, they show a smaller net income on their tax returns. Our team is well versed in these loans and placing the borrowers where they can get the optimal loan to fit their needs. For investment properties, please review our No Income Verification program.

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How To Get Mortgage When Self Employed?

If you’re one of an estimated 14 million self employed workers in the United Sates it is easier than ever to get approved if you have sufficient credit for a mortgage loan. Fannie Mae has relaxed some of their guidelines for documenting income for the self employed. Here are several tips to help you get a self employed mortgage loan with bank statement programs being offered by today’s lenders. 

Self Employed Mortgage Lender

If you’re going to finance your home purchase with traditional financing that is conforming to Fannie Mae and Freddie Mac guidelines you will be required to document your income from self-employment. In general Fannie Mae will want two years worth of tax returns to document your net income and prove business solvency. Meeting this requirement can be difficult for borrowers that are just starting out with their business.

If you’re purchasing a new home or refinancing your existing mortgage there is a specific process everyone goes through to get approved for a home loan. Under the old guidelines self employed works had difficulty qualifying based on proof of income. This happens for a variety of reasons including how a business is structured and even deductions taken on tax returns.

Many self employed workers have no history of paychecks that can be documented. They take may take distributions with no regular amount or frequency making qualifying based on income difficult even with bank statements and tax returns.  If your business is new and you don’t have documented sources of revenue or even two years of federal tax returns this can make qualifying for a traditional mortgage difficult, if not impossible.

If you have a history of paying yourself from your business, Fannie Mae’s guidelines state that your business only need to have adequate revenue to support your future distributions. Your lender will require documentation that your business is legitimate and solvent. This could be provided in the form of your letters of incorporation or the K-1 filing which highlights your percent ownership in the business.

The underwriting process is still going to be more complicated for self employed borrowers. Fannie Mae and Freddie Mac have similar processes to verify income from self employment. These requirements follow the ability to repay guidelines to ensure that you have adequate income from self employment to repay the loan. Lenders adhere strictly to these guidelines so that the loans can be sold to Fannie Mae and Freddie Mac.

If you don’t have two years of business tax returns the guidelines you may be able to qualify for a bank statement program using your personal bank statements as an alternative to a conventional mortgage. These types of programs are available from boutique portfolio lenders and offer reasonable rates and fees.

Common Roadblocks for a Self Employed Mortgage

The most common roadblock self employed workers face is proving how much your net income is from the business based on tax returns and deductions. You may have significant cash flow in your business but could be in for a shock when you learn your qualified net income based on tax write-offs and expenses for your business. If you cannot demonstrate sufficient net income from your business it still may be possible to qualify for a bank statement program using income on your personal statements.

Beware Business Tax Deductions

Running a business as a self employed worker can be very expensive and often comes with significant tax liability. The temptation can be to lower your taxable income with deductions. These deductions include business expenses for things like equipment, expense accounts, and annual depreciation.

Taking business deductions may save you money on your taxes but it could make it more difficult to qualify for a mortgage. As a self employed worker, you are qualified for a mortgage based on your net income, not gross income for a traditional worker. 

Most self employed business owners claim as many tax deductions as the law allows which significantly lowers your net income and therefore your ability to qualify for self employed home loans.

Debt to Income Ratio for the Self Employed

Maintaining a low debt to income ratio is important in qualifying for any mortgage loan. As a self employed worker your debt to income ratio is calculated differently from traditional workers. 

Your debt ratio is calculated by your average net income from the most recent tax returns along with current year income and expenses. In order to be approved for a self employment mortgage your debt-to-income ratio cannot be more than 43 percent. 

If you’re considering purchasing a new home or refinancing your existing mortgage you might want to consider taking fewer tax deductions to reduce your debt-to-income rate with the highest possible net income.

Mortgage Documentation Makes a Difference

The loan process you’ll go through as a self employed worker is the same as everyone else. Where it gets sticky is providing documentation. The more you have to prove that business is sustainable and solvent, the easier the process becomes. 

Keeping meticulous records of income and expenses will make it easier to prove that you are a viable business as well as documenting net income which is essential for maintaining a favorable debt ratio.

Mortgages for Self Employed Workers

Mortgage lenders generally consider self employed workers to be higher risk than those who work for a traditional paycheck. Higher risk borrowers pay more at closing and over the life the loan with higher interest rates. If you’re accepting a higher interest rate when you purchase your home you may be able to lower that rate down the road by demonstrating a reliable payment history and refinancing.

How You Structure Your Business Matters

There are several different ways to be self employed and underwriters treat them all differently. The most common business structures include sole proprietorship, partnerships, LLCs and S corporations. 

Under a sole proprietorship your business income is reported on schedule c of your tax return. With a partnership profits in the business are split between partners based on their respective percent of ownership. Limited Liability Corporations are considered pass-through entities for tax purposes. S corporations follow strict guidelines for distributions. Depending on how you structure your business you could potentially pay yourself on a w-2 and avoid the hurdles of a self employed mortgage completely. Your accountant can help you choose the optimal business structure for your company.

No matter how you choose to structure your business there are steps you can take to maximize your income form self employment and maintain an optimal debt ratio. All of these factors are under you control and are part of maintaining healthy finances as a self employed worker.

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