Self-Employed homebuyer Looking to Purchase or Refinance a Home
Before granting a mortgage loan to a self-employed person, lenders have to examine according to Fannie Mae:
· "the stability of the borrower’s income,
· the location and nature of the borrower’s business,
· the demand for the product or service offered by the business,
· the financial strength of the business, and
· the ability of the business to continue generating and distributing sufficient income.”
Analysis of this Income type
This entire analysis is trying to establish if the applicant is generating enough income now to repay the mortgage loan, but also is able to generate income in the years to come.
Borrowing money got simpler for self-employed persons. Meaning for individuals who have “a 25% or greater ownership interest in a business”. In 2016 Fannie Mae changed the guidelines related to self-employed person income.
Here are the rules you should follow if you are self-employed and you need a conventional home loan:
· May require applicant to show adequate liquidity to support income withdrawals but doesn’t have to prove access to business income.
· One year of tax income may be possible & not two as it used to be. This is true if returns can prove 12 months of self-employment income with a sound cash flow.
What to Expect
Prepare for this loan application in advance. If you write off too many expenses the leftover income will not be high enough, according to the underwriter’s interpretation for loan approval.
Pay also attention to the inconsistencies triggered by possible business fluctuations. Lenders examine major fluctuations and typically use the lower amount of the most recent two years when deciding on your certain income. They will also check if this low income was a one-time event or is a recurring one.
If your income in the most recent year was much lower than usual, the underwriter will need to verify it was a one-time event and not a downward trend in your business.
Will not require income coming from a "salary" job as proof of income for self-employment. Thus, applicants living off social security income, retirement income, pension payments, etc. can now successfully apply.
An applicant that can qualify for the loan using the income coming from a "salary" job do not require proof of income for their self-employment side. They can waive this during the underwriting process.
Will not require Co-applicant's income from self-employment if you are not using them to qualify for the loan.
Note that for FHA and VA loans application process/rules may be different.
Most lenders require the following documents, all pages, including blank pages.
· Current business license (If the case).
· Personal federal tax returns, including all schedules filed in the last 2 years. One year filed tax return if 2 years are not available.
· Schedule K-1 if ownership is 25% or more. Will require Recent 2-years.
· Most recent 2 months bank statements and asset statements.
· Most recent Profit and Loss Statement showing year-to-date revenues and expenses (if applicable).
· Property’s Current Homeowners' Insurance, including premium, coverage amounts and agent’s name & phone number.
· Last 2 paystubs with the year to date earnings, in case the person is self-employed with corporation filing.
· Last 2 years' completed Corporation tax return (1120(S). Under the same circumstances as above.
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If you are a self-employed person and you want to learn more about the application process for a mortgage loan in the state of Nevada or you want to be sure about the specific documents required by various lenders, don’t hesitate to contact Casey Moseman.