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- What Are Netting Escrows & How Does It Work?: The Best Guide - January 2, 2024
- The Secret About Prescriptive Easement: Top Guide 1 Must Know - December 4, 2023
- About Home Equity Loans In Texas And How Can One Obtain It - November 27, 2023
Self-Employed Mortgage
If you are self-employed and looking to get a mortgage you might be a little fearful because you hear all these stories of people not being able to get approved for a mortgage because they are self-employed.
In this post, we will learn types of mortgages for self-employed and how to get approved for these self-employed mortgages.
What is the difference between the mortgage for self-employed and employed borrower?
If you are self-employed maybe you own a company whether it looks like an LLC or Corp and you are trying to get a mortgage.
Why is this income different from a regular employee? The main reason why your income as a self-employed borrower is different from somebody who is a W-2 employee is that a lender takes on more risk.
They view self-employed borrowers as riskier than regularly employed borrowers. That is because lenders want a stable and consistent income.
When somebody works for a company, normally that income is viewed as more consistent than somebody who is self-employed because they have a company that usually is providing a paycheck and there is the assumption that the company is doing well.
However, when you are self-employed, lenders don’t take that assumption.
Their assumption is you own that business or a majority of that business and they need to make sure that not only are you underwritten but the business is also able to provide cash flow in the future to pay that mortgage down.
Lenders use what is called the ability to repay the role. This means the lenders have to look and see can you actually afford this mortgage, can you pay it back based on everything that they are looking at.
They can only consider taxable income. This is where the self-employed borrowers get into a little bit of trouble.
Maybe this year you made a hundred thousand dollars personally but you wrote off maybe sixty thousand dollars.
So for the lender, you only made forty thousand dollars for that year they can’t take a hundred thousand dollars as your income.
That is why it could be a little tricky. You have a lot of deductions and your income might be fluctuate depending on seasonality.
Types of mortgage for self-employed borrowers.
So there are two different types of loans that you are going to run into as a self-employed borrower.
1 - Traditional Loans
These are just your regular loans like conventional loans or FHA loans, VA, or USDA. When we are qualifying with one of these loans, your write-offs are going to have a huge impact.
Due to this qualifying for a traditional mortgage when self-employed can have a dramatic change. The lender would only like to look at your net income, which is the income after your write-offs.
They are also going to require 1-2 years of personal and possibly business tax returns.
So if you are looking to get a traditional mortgage, you might want to be prepared with these basic documents to provide to a lender to see if you can qualify for the mortgage.
Your trusted loan officer would be able to walk you through what that looks like.
The lender might also ask for a profit and loss form for your business, especially if your business is a sole proprietorship or you have a majority stake in the company.
They want to take a look at the P&L to see the trend and cash flow of your business year over year to qualify you for the self-employed mortgage.
2 - Portfolio Loans
Let us say that your write-offs are too high and you don’t have enough net income to show for how much income you make. Portfolio loans are the loans that help you qualify based on your gross income.
However, the interest rates on portfolio loans are higher compared to any traditional mortgage. There are two types of portfolio loans.
The first one is the Bank Statement program.
The bank statement program is a self-employed home loan program where instead of showing your tax returns, a lender asks for the last 12 to 24 months bank statements.
What the lenders do is they average the deposits over the past 12 to 24 months and give you an income. You might be able to use personal bank statements or you could use business bank statements.
Normally with business bank statements, they use a factor of 50% expense ratio.
The second portfolio loan is a 1099 program.
These are a little bit newer programs where a lender would just look at your past 1 – 2 years of your 1099 and then they normally use an expense factor on that as well which usually is around 10% of your annual income.
Conclusion
Being a self-employed borrower you need to make sure you have a keen sight for your taxes. Because if you are not the chances of you getting approved for a mortgage when self-employed is comparatively low.
There are other options available, however, they come with higher costs and interest rates.
Overall, if you are self-employed it’s not the worst thing to go through the mortgage process, it might be more documentation and a little bit stressful and might take a little longer to close.
Find a lender who can make sure gives you the right mortgage option and later compare your mortgage quote to get the best one.
