Self-Employed Mortgage Loans
Borrowers can qualify for a self-employed mortgage with a single year’s tax return.
- Most guidelines require lenders to average the most recent two years of income to qualify applicants.
- Some programs allow borrowers with newer businesses if they have experience in their field and their income is at least what it was as a salaried employee.
- Underwriters use an adjusted taxable income to qualify self-employed borrowers, not the gross income.
Qualifying self-employed borrowers’ home loans often requires additional commitment from underwriters in the form of time, energy, and persistence.
Self-Employed Mortgage Loan Guidelines
Given the new federal lending rules and guidelines requiring lenders to verify applicants’ ability to repay before extending credit, it is easy to understand why self-employed borrowers present special challenges. If a lender chooses to comply with the new qualified mortgage rules, a self-employed borrower must also meet the 43% debt-to-income (DTI) limit.
It is important to keep in mind that self-employed mortgage loans have similar guidelines as other types of mortgages as other programs, including conventional as well as FHA-insured loans. The same loan terms—such as 15- or 30-year terms—are also available to self-employed borrowers’ mortgage loans.
Mortgage lenders generally underwrite their loans based on guidelines established by Fannie Mae, the Federal Housing Administration, or the U.S. Department of Veterans Affairs. Fortunately, these organizations also offer underwriting guidelines for self-employed borrowers, and lenders typically follow these standards. In addition, some lending institutions have introduced special guidelines for self-employed borrowers’ mortgage loans.
Special Guidelines for Self-Employed Mortgage Borrowers
In general, the following factors apply when evaluating a mortgage application from a self-employed borrower.
- Stability of the borrower’s income (and the absence of significant variability in income).
- The area and location.
- Nature of business.
- Demand for the product or service offered by the business.
- Financial stability and longevity of the business and market feasibility.
- Ability and potential of the business to continue generating sufficient income.
Declining income is a special concern for underwriters. You’ll need to explain a drop in income and reassure the lender that it does not indicate a general trend of falling income. This is important because lenders want know you will make the mortgage payments in the future. Marketability of the property that is security for the mortgage as a private residence is also important.
Length of Self-Employment
Lenders typically must obtain a two-year history of the borrower’s prior earnings to demonstrate the likelihood that you will continue to receive this income. However, individuals who have been self-employed between 12 and 24 months may earn mortgage approval. This applies if your most recent federal income tax returns show that you receive as much or more income from your business as you did from a similar profession.
Underwriters carefully consider the nature of your experience and the business debt load. Applicants who have been self-employed for fewer than 12 months are not eligible for loan approval.
Freddie Mac Self-Employed Mortgage
Freddie Mac does allow self-employed borrowers with only one-year tax returns if the self-employed mortgage loan borrower can get an approval from their automated underwriting system (AUS).
Not all lenders honor this and many impose stricter guidelines called overlays. But Gustan Cho Associates will close that loan and we do not add overlays.
Qualifying for a Non-QM Loan
Gustan Cho Associates has dozens of lending relationships with non-QM wholesale mortgage lenders. For any non-QM mortgage loan program in the marketplace, the team at Gustan Cho Associates also offers it.
12-month bank statement loan program
Non-QM wholesale lenders are now offering countless non-QM wholesale lender programs for self-employed borrowers. The 12-month bank statement loan program with no income tax returns is a very popular loan program with business owners.
Non-QM bank statement loan programs are available for self-employed borrowers for primary residences, second homes, and investment properties. Expect to put at least 10% to 25% down depending on your credit and the program.
Help for Self-Employed Borrowers
Non-QM loans are a great loan program for self-employed borrowers. Gustan Cho & Associates doesn’t care about the borrower’s adjusted gross income. It can be a loss on income tax returns. The monthly deposits are averaged for the past 12 months. The average monthly deposit over the past 12 months is what is used as the monthly income. You cannot have any overdrafts. Withdrawals do not matter. For example, you can make a $10,000 monthly deposit and withdrawal of $9,999 and only the deposit of $10,000 is used. It is a great loan program for owner-occupied, second homes, and investment properties.