Self-Employed Income Qualification for Mortgage Loans
Getting a mortgage when you’re self-employed can be challenging.
- Deductions from taxable income can reduce your borrowing power.
- Proving what you earn is not always easy.
- If the most recent tax returns show a drop in self-employment income, lenders may not give you credit for all of your income.
Fortunately, there are creative programs that allow alternative income verification for self-employed applicants.
Stated Income Loans
Today, the only mortgages that don’t require proof of a borrower’s personal income are loans for income property where the property itself generates enough income to cover the mortgage payment.
Loans for primary residence, however, are subject to the Ability to Repay rul or ATR. Lenders must by law verify income when you apply to buy a personal home.
Self-Employed Income Qualification But…………
- Schedule C, Profit, and Loss, of your federal income tax return shows gross receipts of $100,000
- But you deducted your home office, the company trip to Hawaii for meetings, business dinners, furniture and a couple of laptops to the tune of $25,000.
- This means that you r lender only counts $75,000 in income for the year
- This is the income that the lender will use to qualify you and calculate your debt to income ratio for a loan approval
So while it may seem beneficial to claim higher deductions for tax purposes, your purchasing power will be impacted by your limited income on paper.
Amending Tax Returns
If you know you’re going to buy a house soon, can you amend your old tax returns to show more income? Yes, you’re allowed to do that. You’re also allowed to file a return showing more income and then amending to add your deductions and reduce your taxable income.
However, that can be a real hassle and if you make a mistake it could get you into IRS hot water. There are other loan programs that ight work better for you.
Grossing Up Income
What Are Lenders Looking For?
Some special circumstances will allow you to provide just one year of self-employment history. For example, if you worked in the same industry before becoming self-employed and your pay is now at least what it was an employee.
Additionally, some loan programs may allow one year of self-employment with an automated approval.
Some lenders may use your retirement or other assets to increase your income. That’s called asset depletion. They might, for instance, discount your savings by 70%. Then they divide that by the number of months in your mortgage. The result is extra monthly income for you.
If you have less than one year of self-employment income, you will find it very difficult to get a mortgage loan.
Bank Statement Loans
Gustan Cho Associates now offers 12 months bank statement loans for self-employed borrowers. You don;t need tax returns. Underwriters average bank statement deposits to calculate an average income.
You’ll need a 10% to 20% down payment. Your mortgage rate depends on the down payment and credit scores. There is no mortgage insurance requirement.
Get Expert Help
Alex Carlucci is a senior vice president for Gustan Cho Associates and a producing licensed mortgage loan originator. He is based in our corporate headquarters in Lombard, Illinois. Alex is an expert in originating FHA, VA, and conventional loans with no lender overlays.
Gustan Cho Associates Mortgage Group honors the findings of automated underwriting systems (AUS) with no additional overlays.