Home Loans for Self Employed
What you need to know if you're self employed, and are thinking about applying for a home loan.
Being self employed (SE) raises many challenges when applying for a home loan. Although you are master of your own destiny with your income, you can also hinder your ability to qualify for a mortgage. Here are some helpful tips to use that will benefit you come qualification time:
1. Length of time being SE: Lenders often look at the length of time someone has been on their current job and the length of time in their current profession. The purpose of this is to show stability of income; and that stability will prove how well you are qualified to purchase a home. Lenders often look for anyone that is Self Employed to have been the owner of their company for at least a 2 year period. This shows not only stability, but, a proven track record of income that can be averaged over a two year period. Not only is past income important! Lenders look at the history of the business to appropriately determine the likelihood that income will continue to at least another 3 years.
2. Are you compliant? A few things to ask yourself regarding your business are; what is the best structure for my business for tax purposes? How often have I changed the structure of my company over the past couple years (sole proprietorship, SCorp, LLC, Partnership, etc)? Have I completed all necessary information with the Secretary of State to be compliant? How does my business show up on the BBB? What comes up when my business or name is Googled? All these are important things to consider because this all will be looked upon by an underwriter. Keep in mind that your Self Employment must be verified through multiple sources.
3. How many expenses are you taking? Being Self Employed allows you the benefit of expensing certain business costs but taking too many expenses can hinder the amount of usable income a lender can use to qualify you. Simply put, the income you pay taxes on (adjusted gross income) is the income a lender will use in qualification. The more expenses you take the more you are reducing your usable qualifying income. In most cases, the only expense a lender will add back to their income calculation is depreciation or depletion.
4. Be prepared to give your lender your personal tax returns as well as business returns! Income can only be calculated by analyzing your personal tax returns along with all business tax returns. Even though most income will reflect on your personal return, there are additional expenses that could be taken into consideration as well as expenses that could be added back to the income calculation. (see #3)
5. Can I use my business bank account for my down payment? This is a very common question but one that needs to be answered very carefully. Usually, assets residing in a business account can be used towards the down payment as long as the withdrawal of funds doesn’t negatively impact the sustainability of the day to day operation of the business. Lenders will want to verify the funds like they would normally through banks statements and such, but they will also go one step further. Typically a letter from a principal in the company (other than yourself) or a letter from your CPA stating the withdrawal of the assets will not have a negative impact on the business will suffice.
It is extremely important to understand that everyone's situation is completely different and will vary in the type of documentation that will be required. Also, every lender can be different on what they will allow or require when it comes to any of the items listed above. Consult your trusted mortgage professional for advice about your particular situation.