You would think that there would be a great loan option for self-employed borrowers. With the shift in the economy and real estate market I have noticed a huge void in the lending market...loan products for self-employed borrowers! So many of my self-employed clients have plenty of assets, money in the bank, and great credit. The problem is they can't get a loan. Why is this? Well, I will explain below:
Many self-employed individuals report expenses on their taxes in order to reduce their tax liability, but this can backfire when they apply for a mortgage. For tax purposes it might be beneficial to to write off as many expenses as possible to make your net income low (gross income - expenses = net income). Unfortunately, when it comes to qualifying for a loan the net income is what is used for qualification.
“Self-employed people typically report their gross income minus expenses to generate a net income,” says McDonough. “For tax purposes, it may be beneficial to have net income as low as possible, but the net income is the number used for income qualification.”
Even borrowers with $1 million in the bank and a credit score of 800 may not be approved for a mortgage if they do not have a qualifiable income stream. In addition to proving that you have enough income to qualify you must show that you have been self-employed for at least two years (this can be done with tax returns).
Self-employed borrowers who apply with a co-applicant still need to follow the same process of proving income. Those who report a loss on their taxes may be better off applying only with the co-applicant’s income. For example, if one borrower earns $100,000 and the other has declared a loss of $10,000, their combined income is $90,000. Also,making a larger down payment can help if the borrowers are close to qualifying and the smaller loan size lowers their debt-to-income ratio enough.
So, if you have plans to purchase a home make sure you plan ahead with your tax returns.
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