Self-employed mortgage loans have long had a reputation of being difficult to obtain since the housing crisis. That is because many self-employed borrowers don’t show enough “qualifying” income. Qualifying income is what the lender uses to determine your income and comes from the bottom line of your taxes not the top line.
However getting a mortgage if you are self employed has gotten easier. Recent changes make it easier because guidelines have loosened up. Previously you needed two years of tax returns, now you may only need one year of income tax returns to prove your income, as long as your application qualifies for Fannie Mae or Freddie Mac’s automated underwriting engine.
When you apply for a mortgage, a loan officer will ask you the amount of your income. If you are self employed and respond that you make $6,000 per month, but after you file taxes and claim expenses then your income per your tax returns is $4,000 per month. To qualify for a mortgage the income that is used for qualifying is the adjusted gross income or income after expenses. So in order to get truly qualified upfront, a good loan officer will ask for your 1099’s, K1’s, and any other documentation of income and full tax returns. Only after analyzing these documents can it be know what your qualifying income is. After figuring out how much you make then your length of self employment must be qualified. You used to be required to show a 24-month self-employment history to get a mortgage. Now, Fannie Mae says that you may qualify with 12 months of self-employment if you have previous experience in that field, and your income is at least as much as you earned in that field before becoming self-employed.
For self-employed borrowers with a history of paying themselves, they may qualify with just one year of tax returns. Those returns must show at least 12 months of self-employment income. Also under new Fannie Mae’s rules, borrowers qualifying for a mortgage using the income of their primary job don’t have to prove what their income is on their side job, which they used to have to do. This applies to borrowers living off retirement income, social security, pension payments, and/or dividends. If you meet these guidelines then self employed borrowers can receive the same low rates that are enjoyed by non self employed individuals.
If you are self employed and cannot qualify based upon the above mentioned guidelines then you may be able to qualify with a bank statement loan program. These alternative programs allow you to count all of your business cash flow as income. Under these guidelines, you provide anywhere from one to 24 moths of your business and or personal bank statements. Lenders calculate the amounts going in each month, average it, and use that amount or something similar to come up with qualifying income. Please note that these programs have higher mortgage rates. Standard Banks will not originate a bank statement loan.
If you are self employed please plan ahead prior to buying a home. Talk with a mortgage professional and file your tax returns accordingly. Please remember that when you are self employed, filing taxes can be a double edged sword, the more expenses you have the lower your tax bill but this will also lower your ability to qualify for a mortgage.
The bottom line is if you can document enough self employment income through your tax returns then you should be able to get a mortgage at any lender that originates loans that are backed by Fannie Mae, Freddie Mac, VA, USDA, and FHA. These are all considered Conventional and Government Loans. They offer the lowest most competitive rates and should be the same rates that others can get. If you need to use bank statements to show enough income then your loan will be through a lender that “portfolios” your mortgage, so either way, a mortgage broker is your best bet to see what lender can help you.