This blog will cover and discuss qualifying for no-doc mortgage loans for self-employed borrowers with no income tax returns required. Remember back in the days when no-doc loans were the most popular mortgage loans for homebuyers and real estate investors. No-doc mortgage loans disappeared for many years, but they are now back.
Homebuyers who do not have traditional income, are working for cash, or are entrepreneurs can now qualify for non-Doc home loans. No-doc loans are now the most popular loan program in the nation.
Gustan Cho Associates are experts in no-doc mortgage loans. We have multiple wholesale investors for no-doc mortgage loans. We will discuss self-employed borrowers and how to qualify for home loans with no income documentation. Self-Employment comes with a laundry list of complications. If you own your own business and do not have quantifiable income, you can still qualify for a mortgage, even without your income tax returns. In the following sections of this guide, we will cover non-doc mortgage loans for self-employed borrowers.
Can You Still Get a No-Doc Mortgage For Self-Employed Homebuyers?
Before the financial crisis of 2008, self-employed borrowers had no problem qualifying for a mortgage due to no-doc loans. No-doc loans are mortgage loans that do not require income documentation or income tax returns. No-doc mortgage loans require at least a 20% down payment and reserves. Reserves are one month of principal, interest, tax, and insurance or PITI.
The number of reserve months depends on the borrower’s credit score. The higher the credit score, the less the reserve requirements. Self-employed borrowers or borrowers with non-traditional income can now qualify for non-QM home loans with no income tax returns required.
Self-employed no-doc mortgage loans enable 1099 wage earners and business owners who claim a lot of unreimbursed business expenses to now be able to qualify for a mortgage using alternative income sources without income tax returns. In the following paragraphs, we will cover self-employed no-doc mortgage loans in detail. We will review the qualification requirements for qualifying for self-employed no-doc mortgage loans.
Issues for Self-Employed Borrowers in Getting Home Loans
A self-employed borrower might lack qualified income to qualify and get approved for a mortgage loan. As a self-employed borrower, you may have the perfect credit in the world with an 800 credit score, but without qualified income, lenders will not approve you for a mortgage loan.
You do not need income documentation or income tax returns with a no-doc mortgage loan. Non-QM loans require one monthly bank statement and reserves with at least a 20% down payment.
No-doc mortgage loans are streamlined, and most close in 30 days or less. The team at Gustan Cho Associates are experts in originating and closing no-doc mortgage loans. You might be unable to prove what you are earning. If recent tax returns show declining earnings, you might not get credit for all your earnings.
Deductions from taxable income can reduce your ability to borrow. Typical mortgages require tax returns, pay stubs, and other traditional documentation. Some mortgages allow for alternative income verification and non-traditional income for Self-employed borrowers.
Stated-Income Home Loans For Self-Employed Homebuyers
Self-employed borrowers have used stated-Income home loans for self-employed homebuyers for quite some time. These allow lenders to estimate income from bank balances and credit reports.
The only loans that don’t require proof of the borrower’s income are loans for income property.
Gustan Cho Associates has dozens of stated-income Non-QM wholesale mortgage lenders available for every type of non-QM mortgage borrower. No-doc mortgage loans are becoming increasingly popular for owner-occupant homebuyers, second homebuyers, and real estate investors.
DSCR Mortgage Loans
DSCR mortgage loans are real estate mortgage loans for income properties. DSCR mortgage loans work because the property generates enough income to pay mortgage payments. DSCR mortgage loans are for first-home homebuyers, second-home buyers, and investment properties. Mortgage loans for personal property fall under the “ability to repay” standard.
By law, lenders must verify income when you apply for a traditional private home loan!DSCR mortgage loans fall under non-QM loans.
Non-QM loans are alternative mortgage loan programs often referred to as alt doc loans or alternative income verification loans.
Asset-Depletion Mortgage Loans With No-Income Tax Returns
Asset-Depletion Mortgage Loans are for wealthy individuals who do not have income documentation but do not have a traditional or regular income source.
Asset-depletion mortgage loans benefit retirees, entrepreneurs, individuals who have come to a large inheritance, and other wealthy individuals who cannot document income but have substantial assets. Their assets are used to calculate qualified income. An Asset Depletion is when lenders use your retirement and other assets to increase your income.
The assets need to be documented as liquid assets. Investment accounts, 401k accounts, stocks, bonds, funds in the bank, and other liquid assets can be used for asset-depletion mortgage loans. If you only have one year of self-employment, it won’t be easy to qualify. This is one reason a lender might do this.
Income Qualification for Self-Employed Borrower’s Home Loans
Self-Employed borrowers have issues when the tax return does not show their income. Legitimate business deductions at tax time might make your income look low. Included in these are home office deductions and travel expenses. If you have a home office, it allows you to deduct costs that would be yours whether you worked from home or not.
One of the most popular loan programs for self-employed borrowers is bank statement loans. There are 12 and 24 months bank statement loans. The 24-monthly bank statement mortgage loan has lower rates than the 12-monthly bank statement loan program.
Besides the bank statement mortgage loans for self-employed borrowers, Gustan Cho Associates has other no-income documentation mortgage loans such as stated-income, no-doc loans, asset-depletion, and P and L mortgage loans.
How Much Can Self-Employed Write Off In Income Taxes?
These are things that include utilities, maintenance, rent, etc. This is great, but it does lower your taxable income and, therefore, your ability to qualify for a mortgage. Below is an example.
Profit and Loss, Schedule C of your federal income tax return, shows gross receipts of $100,000. But you deducted your home office, a company trip including business dinners, furniture, and a couple of laptops with monitors to $25,000. Your lender only counts $75,000 in income for the year.
Gustan Cho Associates offers profit and loss statement only mortgage loans with no income documentation required. Only a profit and loss statement only prepared by a certified public accountant.
This is the income that the lender will use to qualify you and calculate your debt-to-income ratio for loan approval. Your debt-to-income ratio (DTI) is a significant factor in qualifying for mortgages! So again, while claiming these higher tax deductions are beneficial on many levels, your ability to purchase a home will be impacted by the lowered income that shows on paper.
Amending Tax Returns as a Self-Employed Borrower to Qualify for a Home Loan
You might ask yourself, if you know you will be in the market to purchase a new home soon, can you amend your tax returns? The answer is yes. Although you can file an amended return, it can be complicated. Amending income tax returns does take time. Many months at best.
Some homebuyers go through the trouble of amending income tax returns to qualify for a mortgage. Many people pay thousands of dollars in income taxes, so the income taxes reflect a higher income.
With the dozens of different types of no-income verification mortgage options, you no longer can explore amending income tax returns as an option. You do not want to get into a compilation with the IRS if mistakes are made. Instead, look to other options first.
Grossing Up Income For Self-Employed Mortgage Borrowers
When you are self-employed, health insurance premiums and retirement account payments will be added to your monthly income. Certain types of income, such as social security income, can be grossed up as much as 25%. If a retiree gets a social security income of $1,000 per month, they can gross up their social security income to 25%.
Grossing up will give more buying power for homebuyers to qualify for a large mortgage. Borrowers can gross up between 15% to 25%. The amount you can gross up depends on the individual mortgage loan program.
All government and conventional loan programs allow lenders to gross net payments from retirement funds such as social security and pension income. Lenders will also add back deductions for depreciation and depletion because those are expenses that you don’t write a check for, “paper expenses.”
What Are Lenders Looking For With Self-Employed Borrowers?
A lender will want to see two years of a 1099 Income to ensure the income is stable. Some programs and lenders will allow you to provide one year of self-employment history, but only in particular circumstances. This would apply if you worked in a similar field or the same industry before self-employment.
Some programs will automatically allow for one year of self-employment. You have to look at individual lenders. Self-employed borrowers with no traditional income can qualify for no-doc mortgage loans. No-doc loans do not require income tax returns. Borrowers do not need a job or prove income.
There are various types of non-QM non-doc loans. We discussed bank statement loans for self-employed borrowers earlier. In the next paragraph, we will cover stated-income mortgage loans.
Bank Statement Loans for Self-Employed Borrowers
Bank statement mortgage loans for self-employed borrowers are the nation’s most popular mortgage loan program. The borrower’s 12 or 24 months bank statement deposits are averaged. The average monthly deposit is used as the qualified monthly income. Withdrawals do not matter. The minimum credit score requirement on bank statement loans for self-employed borrowers is 580 FICO credit scores. The higher the credit score, the lower the down payment.
Three credit tradelines have been seasoned for 12 months, or two credit tradelines that have been seasoned for 36 months are required. Reserves are required. The number of months of reserves depends on the borrower’s credit score. 100% gift funds are acceptable. Bank statement wholesale portfolio lenders want to see 5% of the down payment as the borrower’s funds.
Verification of rent is generally required. However, if the borrower has owned a home in the past three years and is living rent-free, an exception for the exempt rental verification is doable. You need to find a lender who is motivated to find a way to finance you if you are Self-employed. You shouldn’t require tax returns and underwriters’ average bank statement deposits to calculate an average income. You will need between a 10-20% Down payment. The interest rate depends on your credit score and down payment amount. Typically, you will not need Private Mortgage Insurance (PMI).
Mortgage Guidelines For C-Corp Self-Employed Business Owners
A C-Corp or C-corporation is named after the internal revenue code subchapter C. It is an independent legal entity owned by its shareholders. A C Corp’s profit is taxed twice- as a business entity and at the shareholder level.
The company itself can sue and be sued. Corporations can enter into contracts in the corporation’s name. In addition, the corporation does not dissolve when the ownership changes.
There are two types of corporations. One is a large, publicly owned corporation, and the other is a small, privately held corporation.
Shareholders of Corporations Dividend Income Mortgage Guidelines
A company’s board of directors manages and delegates responsibility for daily operations. Shareholders are not responsible for the day-to-day.
Corporations must report income and losses on the IRS Form 1120 and file corporate tax returns.
Dividends are reported on IRS Form 1099-DIV. These are profits to shareholders. Additionally, owners and employees working for the company are obviously paid wages and must report them on their individual tax returns.
Owners of S-Corporations No-Doc Home Loans
Self-Employed no-doc mortgage loans for board members of S-Corporations are now available using an alternative source of income. Bank statement loans are self-employed no-doc mortgage loans with no income tax returns required.
An S-Corporation is a small business corporation. These businesses elect to pass corporate income, losses, deductions, and credits to their shareholders for federal tax purposes. There can only be a limited number of shareholders, no more than 100. This means that the corporation is not taxed as a regular corporation.
Business losses and gains are passed directly to the shareholder, who include the revenues, ordinary income, and other taxable items on their tax returns. The mortgage industry considers a person with 25% or greater ownership in a business to be Self-employed.
Independent Contractor Self-Employed No-Doc Mortgage Loans
An independent contractor is a self-employed worker. This might include professionals like dentists or veterinarians who own their own businesses. An independent tradesperson is Self-employed if they own their own business.
Because these individuals are considered Self-employed, they are subject to self-employment tax. All Shareholders in an S Corp report their income to the IRS. An advantage of an S Corporation is that double taxation is avoided.
Self-Employed No-Doc Mortgage Loans For Independent Contractors
The difference in determining this is that an employer controls how services are performed, and an employee carries out the benefits. When the employer controls only the result of the work, the worker is considered an independent contractor.
Another difference is the direction of cash flow. An employer offers to pay, and the employee receives it. The employer gets paid by deduction from the company income. An employer hires the services of another person in the form of employees.
This section will discuss qualifying for a mortgage if Independent Contractor Wage Earner. Independent contractors receive an IRS Form 1099 from the companies with who they work. The contractor must report their income over a year. On the other hand, the employee must report on a Form W-2. There are advantages and disadvantages to each.
Best Mortgage Lenders For No-Doc Mortgage Loans
No-Doc Mortgage Loans are non-QM loans. Non-QM loans are portfolio loans, which are kept in-house by portfolio lenders or sold to financial institutions on the secondary market. Large financial institutions like hedge funds, insurance companies, and money managers purchase non-QM loans. Fannie Mae and Freddie Mac do not purchase non-QM loans.
Each non-QM wholesale portfolio lender sets its lending requirements on no-doc loans. No-doc loans are the nation’s fastest-growing, most popular mortgage loan program.
One person can be the sole owner, or dozens of shareholders may own it. You will need two years of tax returns if you own 25% or more of a corporation. Additionally, you can own the corporation and still be an employee. You will not need corporate income tax returns if you own less of the corporation. Self-Employment and business ownership come with enough confusing and complicated roads. Contact a mortgage professional who can help you navigate what you need to qualify for a mortgage!