Mortgage Strategies and Solutions for Self-Employed Borrowers
Are you self-employed? Do you own your own business and are struggling to obtain financing? Are your tax returns not allowing you to qualify for the house you wish to purchase?
If you’ve experienced difficulty trying to purchase a home, you may benefit from a non-qualified mortgage (non-QM) loan.
Who Does the “Self-Employed” Term Include?
The term self-employed includes those who own 25% or more of any business entity, corporation, LLC, etc., even if they are a W2 employee of their corporation.
In addition, those that receive their income on Form 1099 and report their income on Schedule C, which includes independent contractors, realtors, insurance professionals, etc., would be deemed self-employed.
Mortgage Options for Self-Employed Borrowers
Fannie Mae and Freddie Mac: The conforming loans offered by Fannie Mae and Freddie Mac may require certain approval requirements, including length of employment and certain DTI ratios. Self-employed borrowers may need to show anywhere from two to five years in business for the best approval odds.
FHA: FHA loans are guaranteed by the Federal Housing Administration and only require a 3.5 percent down payment for most homebuyers. Lenders may have specific conditions that self-employed borrowers will need to meet to qualify for an FHA loan.
Non-QM Loans: Non-qualified mortgage, or Non-QM, loan programs target credit-worthy borrowers who are self-employed, have non-traditional incomes, have assets and no income, or have had difficulty qualifying for a traditional mortgage. A Non-QM loan can be used for rate-and-term refinances, cash-out refinances, as well as a new home purchase for owner-occupied, second, or investment homes.
Qualifying for a Mortgage When You’re Self-Employed
Proof of Income
Self-employed borrowers may need to provide income records such as:
> Two years of personal tax returns.
> Two years of business tax returns including schedules K-1, 1120, 1120S.
> Year-to-date profit and loss statement.
> Balance sheet.
Debt-to-Income Ratio
Once you provide proof of income, your lender will evaluate your debt-to-income (DTI) ratio, which is the percentage of your gross monthly income used to pay your mortgage and other debts. DTI is calculated based on your income after expenses.
As a self-employed taxpayer, you may want to deduct as many business-related expenses as you can because it reduces your taxable income- and your tax bill.
However, less taxable income could create a higher DTI based on the lower amount listed on your tax documents. This is important to keep in mind when you are preparing to buy a home.
Employment History
Most mortgage lenders require at least two years of consistent self-employment in the same industry, so it's important to keep good records of your work history. The following documents can be used to show consistent self-employment:
> Letters from current clients
> Signed CPA statement
> Business license, if applicable
> Proof of insurance for your business
If you have been self-employed for less than two years, some lenders may accept a W-2 from a previous employer in combination with the documents listed above.
Closing Thoughts
30% of our borrowers are self-employed, and we are ready to find the best solution for you. Give us a call or visit us online to determine the best strategy for your home financing goals today.