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.

Prequalify for a lself-employed mortgage in about five minutes. 

Stated Income Loans

Stated income loans were very popular with self-employed borrowers in the past. They allowed lenders to use the client’s estimate of income and to estimate income from credit reports and bank balances.

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…………

The problem with taking legitimate buiness deductions at tax time is that your income might look very low on your income tax returns. Your home office deduction, for instance, lets you deduct costs tht you’d have whether you worked from home or not — utilities, rent, maintenance, etc. But it lowers your taxable income and your qualifying income for a mortgage.
Here is a perfect example:
  • 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

How to increase your income

If you are self-employed, your income will be grossed up, meaning that payments for items like health insurance premiums and payments to a retirement account will be added to your monthly income. Lenders also add back deductions for depreciation and depletion because those are expenses that you don’t actually write a check for. They are “paper” expenses.

What Are Lenders Looking For?

A lender will need to see two years of 1099 income in order to qualify the income as a stable monthly income.

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

What are the solutions for self-employed borrowers?

A motivated lender will search for many avenues and offer a multitude of solutions for a borrower with self-employment income.

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.

Get a custom mortgage quote now. 

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