Mortgage For Self Employed Versus W-2 Borrowers

This BLOG On Mortgage For Self Employed Versus W-2 Borrowers Was UPDATED On May 28, 2017

Qualifying for Mortgage For Self Employed Versus W-2 Borrowers has become much easier this year with the emergence of bank statement mortgage loans for self employed borrowers .

NON-QM Loans are now back and here is the type of borrowers who can benefit from NON-QM Loans:

  • No waiting period requirements after bankruptcy and/or foreclosure
  • Bank statement mortgage loans for self employed borrowers
  • Non-QM Lenders will exempt deferred student loans from debt to income ratio calculations
  • Non-QM Lenders will use the higher middle credit score of the borrower
  • No debt to income ratio mortgage loan program
  • Jumbo mortgages down to 600 FICO credit scores
  • Jumbo mortgages with 15% down payment and no tax returns/no income verification and just 24 months bank statements for self employed borrowers
  • No doc fix and flip rehab loans that can close on the name of an LLC: No tax returns and no income required: 15% down payment on property purchase and 90% financing on rehab project.
  • No income verification investment property loans and portfolio blanket lines of credit on investment properties

Emergence Of Mortgage For Self Employed Borrowers

Income is the most important factor besides credit for mortgage lenders. Lenders want to know how homeowners will be paying for their monthly housing payments. A mortgage applicant can have the best credit scores and a substantial down payment, but how is the borrower able to make the scheduled monthly housing payments for the term of their mortgage.

Here is what lenders look for when underwriting a borrower:

  • Credit and credit scores
  • Time of employment on current job
  • Two years employment history
  • Gaps in employment: Gaps in employment in past two years allowed for W-2 wage earners
  • Is borrower self employed or W-2?
  • Self employed borrowers are considered higher risk borrowers
  • Two years self employment required to qualify for mortgage for self employed borrowers

Most mortgage borrowers are curious as of how long they need to be on their job in order to qualify for a home mortgage loan.

  • Most mortgage lenders will ask the borrowers for two years W2s, and tax returns. 
  • What if borrowers have been a victim of the financial and credit crisis of 2008 and have been laid off for several years and just got a job. 
  • And what if borrowers has re-established and rebuilt themselves and now have a job in a totally different line of work or an entirely different industry?
  • The good news is that people with bad credit, self employment income, and low credit scores can become homeowners again.
  • NON-QM Loans is back and home buyers who could not qualify for home loans with traditional loan programs such as FHA and Conventional Loans can now qualify with short term bridge non-qm financing.

Can Home Buyers Who Started Brand New Jobs Qualify For Mortgage?

Mortgage lenders normally want to see two year of steady employment by mortgage borrowers.

  • Two years of steady employment shows employment stability.
  • However, it is not a federal mortgage guidelines that borrowers be employed with the same employer for the past two years.
  • Gaps of employment is allowed with W-2 wage earners.
  • If borrower was unemployed for six or more months, they need to be employed with new job for at least six months to qualify for mortgage.
  • If borrower was  unemployed for six months or less, they can qualify for mortgage with no waiting period but 30 days of paycheck stubs needs to be provided to mortgage underwriter before a clear to close is issued.
  • Borrowers who have been out of the workforce for extended terms can qualify for mortgage as long as they have been employed for six months on their new jobs and do not have to wait for a two year continuous employment history with same employer.

Case Scenario With Gaps Of Employment On Mortgage For Self Employed Versus W-2 Borrowers

  • Home buyers who have been laid off for less than 6 months, there are no job longevity requirement on a new job you get. 
  • However, if you have been unemployed for more than 6 months, the mortgage lender will want to see a record of six month continuous employment. 
  • However, with Mortgage For Self Employed Versus W-2 Borrowers, self employed borrowers need to have two years continuous employment unlike W-2 wage earners.
  • For example, if a mortgage applicant has been laid off for two years and just started a new job on January 1, 2017, they will be eligible for a mortgage loan on July 1, 2017. 
  • That is six months from the start date of a new job.
  • If a mortgage applicant just started work after an extended period of unemployment, remember that they do not have to wait two years in order to qualify for a mortgage loan. 
  • It does not matter whether you are employed in the same industry or not.

Going From 1099 Wage Earner To W-2 Wage Earner

There are cases where a worker goes from a 1099 wage earner (commission base wage earner) to a W-2 wager. Cases like this is common in the real estate industry where a real estate agent may work as a commission 1099 wage earner at a real estate office and then transfer to a salary operations office job and become a W-2 wage earner.

Here is how it works:

  • To qualify for a home loan for borrowers who are 1099 wage earners, two years employment history is mandatory as a 1099 wage earner and the average of the two years is used to qualify for income.
  • If 1099 wage earner goes from 1099 to W-2 wage earner, then the income from the new employment offer letter is used.
  • Prior writeoffs on tax returns can be exempt from debt to income calculations if the borrower can prove that those writeoffs will no longer be used due to the new W-2 wage earner position.
  • 30 days of paycheck stubs is normally required prior to the underwriter issuing a clear to close.

Going From W-2 Wage Earner To 1099 Wage Earner

If the above situation were reversed where a borrower goes from a W-2 wage earner to a 1099 wage earner, the following rules apply:

  • Mortgage borrower now needs to wait two years from the start date of 1099 wage earner status to qualify for mortgage loan.
  • This is a major hurdle when it comes to qualifying for a mortgage loan because the W-2 wage earner status is no longer valid and the borrower is treated as self employed home buyer.
  • Self employed home buyers can now qualify for home loans with 12 months and/or 24 months bank statement mortgage loan programs.
  • Non-QM Loans may be an option for home buyers who go from W-2 Wage Earner status to 1099 Wage Earner status.

Debt To Income ratios is one of the biggest hurdles on qualifying for mortgage for self employed borrowers. HUD, the parent of FHA, has set very lenient FHA Guidelines On DTI.

Here are 2017 FHA Guidelines On DTI:

Home buyers who are needing more information on  Mortgage For Self Employed Versus W-2 Borrowers can contact The Gustan Cho Team at 800-900-8569 or text Gustan Cho on his cell at 262-716-8151 or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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