Our Guide To Applying For Self Employed Home Loans
The guidelines that restricted self-employed home buyers from accessing financial aid have loosened up. One example is the fact that you will only need a year of income tax documents to prove that you have sufficient income if your application is accepted for automated underwriting.
Another example is that lenders are using new calculating systems for business owners lacking or lacking sufficient distribution history. The new guidelines make it much easier on “moonlighters. Those who are bringing in income from side jobs don’t need the documentation if they are using their regular “day” job to qualify.
Home Loan Approval For Self Employed Applicants
You will have to go through a series of steps when buying a home or refinancing.
The first step in the process is submitting your application, which can be done online, over the phone or in person. Your information will typically be collected by a loan officer who will submit the writing into the Automated Underwriting System (AUS). The days where you had to fill out stacks of forms are long past. But you will have to provide specific information on your income, investments/savings/retirement balances and any other debts you have. Lenders will want to see your employment history and will certainly check your credit history.
Underwriting Self Employed Borrowers
After the information has been entered the AUS will take a moment or two to consider your data and generate a response which will approve, decline or refer the loan to a human underwriter. At this point, the AUS has done its job and the human underwriter will resume their tasks. Now if you have been approved by the AUS, the Human underwriter will take a moment to verify all the information to ensure the information entered into the AUS is accurate. For example, if you say you make $7500 a month, your tax returns or W-2’s should support this. If you say you have $6,000 in the bank your bank statement should reflect this amount.
If the AUS, is undecided or declines the application, the human underwriter will take a look over the information one more time. There may be a way the application can be approved through manual underwriting.
Lenders Only Consider Taxable Income
One of the major obstacles self-employed applicants find on path to financial aid is that they may say they make $6,000 a month, but when the taxable income is actually only $4000. The forms and processes underwriters use to come up with “qualifying” income for self-employed applicants. It begins with the taxable income and then includes certain deductions like depreciation, which isn’t actually an expense that can be charged to your bank account. Then they may subtract income in the “windfall” or “extraordinary” category. If a source of income can’t be proven to be stable in the long term, it won’t qualify as an on-going source of income for your home loan.
Lenders will also examine the assets you declare as the payment they accept must be coming from reliable sources. If you were to clean out your business account to qualify for the loan, you will place your livelihood in danger and then be unable to repay the loan.
They also do this to ensure that you haven’t been collecting undisclosed loans either. If an unusually large deposit has been made into your bank account recently, they may ask you to provide proof of the origin of this sum of money. You will also be asked to provide other information and documentation as well. The underwriter may have specific requests but these will typically be a business license or a statement from your accountant’s office.
Once you have been given the approval from the underwriter you can go ahead with the purchase of your home, so long as the property also complies with the guidelines stipulated by the lender. Of course, you can expect some variation in this because the process is very different and some lenders have specific documentation and other particulars they demand from their borrowers.
How long must you be self employed to get a home loan?
You may have to show a 24-month history of self-employment to be eligible for a home loan. According to Fannie Mae, you might qualify with only 12 months if you can prove previous experience in the field and your income is roughly the same to the amount you were making when you were not self-employed.
Home Loans For Self Employed Borrowers
As of August 2015, Fannie Mae has allowed for a looser set of guidelines that are applied to self-employed borrowers. These updates are featured specifically for three areas.
- Self-employed borrowers without a history of “taking paychecks” (i.e. irregular or non-existent business distributions)
- Self-employed borrowers without two years of federal tax returns supporting their business
- Borrowers with a regular salary don’t have to mention their self-employment if they can qualify without it.
Proving Business Income
Self-employed borrowers with a history of capably paying themselves will not have to prove access to business income according to the new standard home loan guidelines that went into effect in June 2016. Nevertheless, the applicant may need to show that the business is making enough cash to support income withdrawals.
One Year of Tax Returns
There is a chance that self employed borrowers will still qualify for a home loan with only a year of tax returns. In this case, those returns must show a full 12-months of income from self-employment.
Furthermore, the borrower’s debt to income ratio must meet the standards in place by the lender, which is typically 43%, but can often go as high as 50% for a select few exceptional borrowers.
Self Employed “Side” Income
IT is the third provision that most self-employed borrowers get really excited about –– especially for those who do not fully rely on a side business to support their home or daily life. According to the new guidelines from Fannie Mae, borrowers who use their regular income to qualify for a home loan application won’t have to declare their income from any side jobs they have.
Of course, this makes a lot of sense, if the income isn’t important for qualification purposes why does it need to be mentioned at all. This applies to those borrowers who may be living on pension payments, special security income, retirement income and or any other dividends they may have.
Note that these new guidelines apply to specific home loans –– like Fannie Mae or Freddie Mac. Guidelines may be different for other types of home loans.
Self Employed Co-borrowers
Much in the same way, if your loan is already fully supported through your regular job, but you have a co-borrower who is self-employed, lenders don’t need to know about that other business. Why would this be a good thing? Because many of these small business endeavors and even some of the more mature startups don’t show any income on tax returns. So on paper, they can look like they are losses. This is a good thing for trimming down what you owe in taxes, but for seeking financing these things can look very bad and impact your financing for the worse.
According to almost any lender’s guidelines income must be consistent, stable and ongoing to be qualified as “income”. If the regular you are counting on isn’t regular and reliable it can’t be used in your application. Nevertheless, there are sometimes when businesses go through ups and downs but this is not a reflection of poor income.
For example, a home developer may take one year where profits are low as they are investing heavily into buying properties, constructing houses and pulling permits, this year may show little or no profits. The following year when all the sales start to be made things may suddenly change around and income is suddenly soaring.
In a situation like this, where you are making an application during a down year you will want to supply the lender with a few years of tax returns that show your company is perfectly healthy and this slump is normal in the broad scheme of things. Prepare some sort of explanation for year-over-year decreases in income when you apply.
One alternative for Self-employed applicants could be seeking out a personal loan. Personal loans are easier to qualify for than a home loan is, especially for self-employed homeowners. If you are looking to cash out of an existing property via refinancing, taking out a personal loan application may be the best choice for you. On the other hand, if you are looking to buy a property, a personal loan could be insufficient. Unless you are with buying a property for under $100,000 which is what you will find in an average personal loan.
One of the best things you can do if you are self-employed is plan ahead. A home loan professional can offer you extensive help and your accountant’s advice will be invaluable as well. You can adjust the way things are declared and written off to alter the amount of taxable income you have. You can also have previous tax returns amended to include higher incomes in the past. You can also go over the form your underwriters will use to see what your income looks like now.
If you’re self-employed, these documents are required for lenders:
- Two years of tax returns from personal accounts
- Year-to-date profit and loss statement
- Signed CPA letter stating you are still in business
- Two years of properly filed business tax returns including these schedules: K-1, 1120, 1120S
- Business license
- Balance sheet
These documents are all required to process your home loan request, you will want to contact your CPA if you have any issues as they can usually send you the needed items the same day.
What Are Today’s Home Loans Rates?
Self-employed borrowers have better options for getting their home loans approved now than they ever have before. With the rates as low as they are now, it’s a better time than any. Never forget the importance of looking into alternatives if you don’t qualify under normal standards.