Many people come to me after they have been turned down for a mortgage from their local Charlotte or North Carolina/South Carolina bank or credit union. What I hear most often from these clients is “the bank doesn’t understand my income. My business makes X amount of money each year but they will only give me credit for X”. Invariably the issue is that the self-employed client has written off so much income to avoid a big tax bill that they qualify for a MUCH smaller home than they want, or don’t qualify for at all.
The first thing I do is ask the client to send me their most recent 2 years of tax returns so I can do the income calculations and where we stand. In general, only the amount of income you pay tax on can be considered for a traditional mortgage. There are some items that can be added back, such as depreciation and partial mileage.
Here is a list of items needed to qualify for a traditional (Conventional, VA, FHA, USDA) mortgage.
- 2 years personal tax returns
- 2 years business tax returns (if the business is an LLC, Partnership, etc.)
- 2 years W2’s (if the business pays the owner a salary of any amount)
- A year to date profit and loss statement (I have a very simple template if you need one)
- Drivers’ license
- 2 months bank statements, business and personal
Here is a list of common issues I see with self-employed clients
- Too many write offs.
- 2 years of average income is too low. The most recent years income is good, but the year before that was not.
- Cars for business use are financed in the business owners personal name so report on personal credit.
- Student loans
- Alimony and child support payments
- Income tax payment plans
Here is a list of items that can be written off for tax purposes, but added back for mortgage qualification:
- Business mileage (currently 26 cents per mile)
Since the meltdown of 2008, many self-employed borrowers looking for a mortgage have been out of luck. Common sense, for the most part, has disappeared from the mortgage market. Being self-employed, you of course want to take full advantage of the tax code in order to limit your tax liability. The problem is that this also lowers income available to qualify.
Homebridge has a solution for self-employed borrowers looking for a mortgage, but have previous been out of luck. If you are self-employed you may be able to use your business or personal bank statements to qualify for a mortgage.
- No tax returns required
- Personal bank statement qualified based on 12 month average monthly deposits**
- Business bank statement qualified based on 12 month average monthly deposits**
- Loans to $3 million
- Interest only available***
- 2 years seasoning for foreclosure, short sale, bankruptcy, or deed in lieu
- Owner-occupied, 2nd homes, investment properties allowed
- Gift funds allowed
- No pre-pay penalty for owner-occupied and/or 2nd homes
- SFRs, townhomes, condos, and 2-4 units
- DTI 40/45% with no additional reserve requirement
*These product may have a higher interest rate, more points or more fees than other products requiring documentation.
**Verification of expense ratio required from CPA
***Interest-only options may not be available in all states. Please contact your LMA for more details.
If you are self-employed and have been unable to qualify for a mortgage and are looking for an out of the box solution please get in touch with me to learn more.