Self employed home buyers who are looking for a mortgage are finding it difficult to qualify using the net income on their tax returns. Prior to the mortgage meltdown, there were no doc loans available for virtually anyone which made it easy to get a mortgage if you own a business. Today, there are not as many options and it is not easy to find a self employed mortgage.
Requirements for a Self-Employed Mortgage:
- No Tax Returns
- Down Payment of at least 10%
- Self employed for at least 2 years
- Provide 12–24 months bank statements with steady deposits
- Credit scores as low as 500 but larger down payment may be required
- Credit scores can be as low as in the 500’s
The difference today is you are providing bank statement deposits as the basis to determine whether you can qualify. Years ago, stated income loans would have been used and the income would have been “stated” but with no proof of any kind.
Self Employed Mortgage Programs Available
The following mortgage programs can be helpful if you are self employed:
Bank Statement Loans –You provide 12–24 months of your bank statements and no tax returns. The average monthly deposits will be used as income to qualify.
One Year Tax Return Mortgage — The one year tax return are for those who may have only been in business for 1 year. This will work if you can qualify based upon the net income on that lone tax return. Additional compensating factors will likely come into play.
FHA Home Loans — FHA lenders can help with an FHA loan with 1099 income. This is great news for contractors and others who are in a non-traditional line of business. Keep in mind that you still would need to qualify based upon the income that you can document.
If You are Self Employed and Can Document Your income
If you are able to document your income using tax returns, then your options are wide open and will be similar to those who earn W2 income.
Income Documentation — You will need to provide 2 years tax returns and a letter from your accountant indicating you have been in business for at least two years.
Mortgage Programs — If you are able to document your income, then you will have the ability to qualify for government programs, conventional loans, FHA loans, and virtually any mortgage that a W2 salaried borrower would also qualify for.
We find that most self-employed borrowers do not qualify for these programs because of their low net income that is reported.
Summary
The most important part of qualifying for a self employed mortgage is preparing yourself financially well ahead of even searching for a home. Speak with a loan officer in advance so any potential issues can be resolved before you find your dream home. This could mean improving your credit scores, saving more for the down payment, or even gathering the documented proof that you are self employed.
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