This BLOG On Self Employed Mortgage Borrowers With No Income Tax Returns Was PUBLISHED On June 7th, 2019
Many lenders consider self-employed individuals to pose a greater risk of defaulting on a mortgage.
- This is because their incomes often vary from month to month and from year to year
There are two types of loan programs that Gustan Cho Associates Mortgage Group has for self-employed mortgage borrowers
- The traditional loan program offered with government and/or conventional loans
- The new popular bank statement loan program for self-employed borrowers where no income tax returns are required
Unsteady incomes can obviously affect a borrower’s ability to make regular, timely mortgage payments:
- In addition, some self-employed mortgage borrowers may be personally liable for the business’s debts
- This is depending on how the business entity is structured
- Small businesses typically have high failure rates, especially within the first two years
- For these reasons, self-employed mortgage borrowers are often subject to greater scrutiny and tougher requirements when trying to qualify for home loans
Qualified Income Issues With Self-Employed Borrowers
Some self-employed individuals have seasonal incomes. Others transact their businesses primarily on a cash basis.
- Many may have ample income, appreciable assets, and proud credit histories
- Some may work on commission or not take a consistent salary
- While a person’s ability to repay the loan may exist, it may not be readily apparent
- Most self-employed individuals take as many income tax deductions as possible
- They do so because they can to minimize their tax liabilities
- However, by maximizing deductions, self-employed individuals also lessen their reported income and cash flow
- This affects their ability to qualify for a mortgage
- This is because lenders look at net income rather than gross revenues when assessing a self-employed person’s ability to afford a home loan
- Having a lower net income will also have a significant effect on self-employed borrowers’ debt-to-income ratios
- However, as we’ll learn later in the module, some lenders may allow certain tax deductions—such as the following:
- casualty losse
- The above can be added back to a person’s net income for qualification purposes
Who Are Self Employed Mortgage Borrowers?
The Internal Revenue Code (IRC) defines a self-employed individual as a person who meets one of the following:
- carries on a trade or business as a sole proprietor or an independent contractor
- is a member of a partnership that carries on a trade or business
- is otherwise in business for himself or herself (including a part-time business)
In the mortgage industry, a person is considered self-employed if he or she owns 25 percent or more of a business (whether a sole proprietorship, partnership, LLC, or other entity).
- When working with customers who are self-employed, it is important to listen carefully and learn about their businesses
- You must know which business structure the customer is using to conduct business
- In other words, is a customer operating as a sole proprietor, partnership, limited-liability company (LLC), or another type of business entity?
- Is the customer an independent contractor who receives a Form 1099 when tax season rolls around
- Knowing the structure of the business will help the lender evaluate the business’s stability and the extent of the borrower’s involvement in it
- This will also help you understand which types of income tax schedules and forms you will need to evaluate to qualify a self-employed borrower for a loan
How a business is legally structured is important due to the fact that it determines the manner in which the business income or loss must be reported to the Internal Revenue Service as well as the types of taxes that are needed to be paid and the ability of the business to accumulate capital as well as the extent of the owner’s liability for business debts and losses.
Bank Statement Loans For Self Employed Borrowers
Self Employed borrowers can now qualify for bank statement loans for self employed borrowers. No income tax returns are required. Either personal or business bank statements can be used. Lenders will total 24 months bank statements and divide it by 24. That figure will be the monthly gross income. 10% to 20% down payment is required. The amount of down payment depends on the home buyers credit scores. There is no maximum loan limit. There is no private mortgage insurance required. To learn more about our non-QM loans and bank statement loans for self employed borrowers, please contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org.