Self Employed Income Qualification: Benefits To Being Self-Employed

This Article On Self Employed Income Qualification 

Being your own boss comes with many perks. You get to set your own schedule, you make the rules, you decide how you are going to run your business. But the most appealing benefit to being self-employed is the tax break that comes along with being a business owner.  You can take deductions for business use of your home, automobile expenses, including automobile lease payments, utilities, advertising, supplies………the list goes on and on.  Most small business owners try to take as many deductions as possible so that their tax bill is smaller.

Stated Income Loans

Stated income loans are a thing of the past and was very common with self employed income qualification. Many mortgage borrowers inflated their income and were not required to verify the amount of income that they claimed. Lenders are required to verify all income to satisfy the requirement to verify a borrower’s ability to repay a mortgage debt.  Reviewing self-employment income is very tricky for a lender because it is difficult to verify.

 But…………

What you don’t want to know when you are house shopping is take so many deductions that your income looks very low on your income tax returns.  Here is a perfect example:
Schedule C, Profit and Loss, of your 2015 federal income tax return shows gross receipts of $100,000, however, your Schedule C expenses are $80,000.   This means that you only earned $20,000 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.

Grossing Up 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.  Keep in mind that depreciation, amortization, and other non-tangible expenses (what you actually did not pay out of pocket) will also be added back to net income).  Schedule 2106 is unreimbursed employee expenses for items like clothing, or materials for work such as tools or equipment.  Any expenses listed here will be deducted from net income.

 What Lenders Are Looking For?

A lender will need to see two years of 1099 income in order to qualify the income as stable monthly income.  Some special circumstances will allow one year of self-employment history.  For example, if the borrower, prior to becoming self-employed worked in the same industry and the pay was equivalent, the income may be considered stable.  Additionally some loan programs, may allow one year of self-employment with an automated approval.  Some lenders may take a percentage of assets into consideration, such as liquidation values of retirement accounts, and add this to your annual income to qualify for a mortgage.  A borrower with less than one year of self-employment income will find it very difficult to get a mortgage loan.

Solutions

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

About The Author Of Self Employed Income Qualification: Arlene Di Sessa Of Gustan Cho Associates

Bob Vogel NMLS 1446953 is a senior writer for Gustan Cho Associates Mortgage And Real Estate Information Center and a licensed mortgage loan originator for The Gustan Cho Team at CrossCountry Mortgage. Bob Vogel is based in Hampshire, Illinois and works closely with Gustan Cho. Bob Vogel is an expert in originating FHA Loans, VA Loans, and Conventional Loans with no lender overlays. Unlike other mortgage lenders, CrossCountry Mortgage NMLS 3029 just goes off the automated findings of the Automated Underwriting System and as long as the borrower can meet the conditions of the AUS Findings, they can rest assured that their loan will close. Minimum credit scores to qualify for a California 3.5% down payment FHA Loan is 580 FICO credit scores. Outstanding collection accounts and charge off accounts do not have to paid off to qualify for a FHA Loan with CrossCountry Mortgage. Maximum back end debt to income ratios can be as high as 56.9% DTI for borrowers with at least a 620 FICO credit score.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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