Self-Employed Borrowers Home Loans Mortgage Guidelines

Gustan Cho Associates are mortgage brokers licensed in 48 states

This Article Is About Self-Employed Borrowers Home Loans Mortgage Guidelines

Self Employed Borrowers Home Loans are becoming increasingly popular with the launch of our bank statement mortgage loan program for self-employed borrowers. Self Employed Borrowers Home Loans with no income tax returns non-QM mortgages are now available. There are no maximum loan limits on 12-month bank statement mortgages. The credit score requirements are as low as 620 with our new bank statement loan program. We will compare and contrast income doc versus bank statement loans for self-employed borrowers home loans on this blog. Self Employed Borrowers Home Loans and bank statement Self Employed Borrowers Home Loans. Mortgage underwriters are very careful when underwriting Self Employed Borrowers Home Loans. This is due to the concern of income continuation. In this article, we will cover and discuss How Lenders Underwrite Self-Employed Borrowers Home Loans.

Traditional Self-Employed Borrowers Home Loans With Tax Returns

Self-employed folks and business people have a great advantage of limiting paying income taxes due to the write-offs they can declare on their business and personal income tax returns. Many business owners pay little to no tax due to the many write-offs they can declare on their income tax returns. However, this benefit of not paying too much federal income taxes hurts their chances of qualifying for home loans. Prior to the launch of bank statement loans, self-employed home buyers had a difficult time qualifying for home loans.

How Mortgage Underwriters Calculate Self-Employment Income

Here is how mortgage underwriters underwrite Self-Employed Borrowers Home Loans with income tax returns:
Schedule A Of Self-Employed Borrowers: A person lists his or her itemized deductions on Schedule A.

  • These are the deductions that are subtracted from the borrower’s adjusted gross income
  • Deductions are taken into account prior to calculating the liability
  • Deductions include unreimbursed business expenses

Schedule B Of Self-Employed Borrowers

Interest and dividend income must be reported on Schedule B.

  • Basically, if a borrower’s interest or dividend income is nonrecurring, it would be subtracted from the applicant’s total income
  • If recurring, it can be added to income
  • If a person has tax-exempt interest income, it may be counted as stable income only if it has been received for the past two years and is expected to continue

If so, the tax-exempt income can be added to the borrower’s cash flow.

Schedule C Of Self-Employed Borrowers

Schedule C shows the profits and losses from a business for a sole proprietor.

  • The lender may need to make certain adjustments to the net profit or loss shown on this schedule to arrive at the borrower’s cash flow
  • For example, depreciation and depletion, expenses for business use of the borrower’s home, casualty losses, and amortization can be added back to a borrower’s income
  • While the amount excluded for meals and entertainment must be deducted from income to determine actual income

Schedule D Of Self-Employed Borrowers

Capital gains and losses are reported on Schedule D.

  • A capital gain or loss is generally a one-time transaction (an example would be a gain from the sale of a home)
  • This means that it should not be considered when determining income because it is not recurring

However, if a customer’s business produces a constant turnover of assets that produce regular gains and losses, these capital gains and losses could be considered in determining income.

  • For example, a client may regularly buy old properties, rehab them, and then sell them for a profit
  • In this case, the capital gains could be added back to a borrower’s income
  • It is considered when determining the borrower’s stable monthly income
  • The borrower must provide evidence of ownership of the additional property or asset

Schedule E Of Self-Employed Borrowers

Schedule E shows rent and royalty income.

  • The lender may include the total amount of royalty payments received and must document the borrower’s receipt of royalty income for 12 months
  • In order for royalty income and other income to count is the fact that the borrower is likely to continue receiving this income for at least three years

If a borrower reports rental income on Schedule E, only the rental income relating to the properties shown on the list of real estate owned in the borrower’s loan application should be included.

Rental And Other Income

Rental And Other Income

Rental income is acceptable provided the stability of the rental income can be documented through:

  • a current lease
  • an agreement to lease
  • a rental history over the previous 24 months that do not have any gaps longer than three months
  • Gaps may be due to being student, seasonal, or military renters

Any regular and ongoing expenses for rental properties—such as maintenance expenses, advertising, mortgage-debt service, property taxes, management fees, utilities, and supply costs—should be subtracted from the borrower’s cash flow.

Depreciation related to income (or loss) from the rental property must be added back to a person’s net gain (or loss).

Schedule F Of Self-Employed Borrowers

Schedule F shows farm income or loss and is commonly used only in certain parts of the country.

  • If this schedule reflects depreciation, amortization, casualty loss, depletion, or business use of the home, it may be added to the borrower’s adjusted gross income

Adjustments To Income For Self-Employed Borrowers Home Loans

When filing income tax returns, individuals will also make a number of adjustments to their income, as shown on IRS Form 1040.
These include, for example, include the following:

  • deductions for contributions to IRAs
  • health insurance premiums paid by self-employed individuals
  • contributions to Keogh retirement plans, penalties on early withdrawal of savings
  • deductions for alimony paid

These amounts can be added back to a person’s adjusted gross income

  • However, any alimony that a person pays must be included as a monthly debt

Form 2106 lists an employee’s business expenses.

  • It is used when a borrower has business expenses required in the performance of employment
  • Business expenses that a borrower actually pays should be deducted from income

W-2s Income: A W-2 shows the number of borrower’s wages that he or she receives from an employer.

  • For example, commissioned salespeople and business owners of C corporations will receive W-2s at the end of each year

Self-Employed Borrowers Home Loans Without Tax Returns

Form 4506If lenders want to verify the accuracy of a borrower’s tax information, they can ask the borrower to sign IRS Form 4506-T

  • Request for Transcript of Tax Return, which lets the lender obtain a copy of the borrower’s filed tax return

IRS Form 4506–T can be used to obtain transcripts for up to four years or tax periods

  • However, only one tax form number can be requested per each IRS Form 4506–T
  • For example, if a self-employed borrower’s income documentation includes two years of personal tax returns and two years of business tax returns, it will be necessary to complete two IRS Form 4506-Ts
  • One IRS Form 4506–T will be required to obtain a transcript of the personal 1040 returns and another will be required for the business returns (Form 1065, Form 1120, Form 1120A, etc.)

Form 4506-T is the best way and fastest way for mortgage underwriters to obtain mortgage borrowers’ federal income tax returns. The Internal Revenue Service provides mortgage lenders a detailed transcript of information of borrowers. This information includes the taxpayer’s information for the past four tax years.

Documents Required To Process Self-Employed Borrowers

Documents Required To Process Self-Employed Borrowers

The Internal Revenue Service provided the following information to mortgage underwriters of borrowers:

Mortgage Lenders can use the above income verified income documentations to underwrite self-employed borrowers’ home loans.

Non-QM Loans And Bank Statement Loans For Self-Employed Borrowers

Non-QM and Bank Statement Loans For Self-Employed Borrowers are becoming very popular. Self-employed borrowers can now qualify with 12 months of bank statement deposits. No income taxes are required. 12-month bank statement deposits are averaged and used as borrowers’ monthly qualified income. Withdrawals do not matter. The minimum credit score required is 500 FICO. There is no maximum loan limit. No private mortgage insurance required. 10% to 20% down payment is required. The amount of the down payment is dependent on the borrowers’ credit scores.

Asset Depletion Mortgage Program Offered At Gustan Cho Associates

Real estate investors with no qualified income but who have substantial assets can qualify for our Asset Depletion Mortgage Program at Gustan Cho Associates.

For more information about our loan programs, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected]