Owning a business certainly has it’s ups and downs. Most enjoy being their own boss and making the key decisions that make an affect on your clients, employees, and the owners’ lives. Although, there is one pain of the self employed business owner – the mortgage loan process. Business owners often get upset with the easy mortgage loan approvals for W2 employees. Just provide a pay stub and W2, then pre-approved! But, getting approved for a self employed mortgage loan is a lot easier if a business owner follows a few tips. We love helping business owners purchase or refinance homes and want to provide owners with the best opportunity for home financing.
Self Employed Mortgage Loan Documentation
Each self employed scenario is a little different from the next and no, it isn’t as easy as a salaried, W2’d employee. But, buying or refinancing a home as a business owner can be done and we want to help. Being prepared is the best advice for a business owner looking for buying a home. Which means already having the documentation required to calculate income before the lender asks. So, the purpose of this article is to help the business owner get the most accurate and quick answer possible after application.
Most Important Income Documentation
Depending on the type of business, the following are key items to supply at application. Keep in mind that certain items do not apply every time. For instance, a sole proprietor would not have separate business returns or K1’s.
- Personal returns – Most recent 2 years
- Business returns – Most recent 2 years
- Amended returns – if applicable
- K1’s for all businesses – Most recent 2 years
- Proof of filed extension – If applicable
Can’t find everything? The easiest solution is to contact your CPA and ask for these items. Most CPA’s are able to easily attach securely to an email and send to the business owner.
Additional Supporting Income Documentation
In cases of higher debt to income ratios or other issues that arise from tax returns, here are possible solutions.
- Proof business pays debts on personal credit report
- Documentation to off-set “mortgages, notes, bonds payable in less than 1 year“
- Asset documentation
- Signed year to date profit and loss statement (audited P&L could allow current income to be factored in)
- 2 most recent business bank statements
Business Paying Personal Debt
Often, business owners must obtain credit cards, car loans, or other debt personally in their name. Even though the business pays the creditor directly, these payment hurt a buyer’s debt to income ratio. Unless, the business owner is able to provide the last 12 months canceled checks which prove the business pays the debt directly to the creditor. Additionally, showing where the debt is included in the business returns is usually required.
Mortgages, Notes, Bonds Payable in Less Than 1 Year
Mortgages, notes, bonds payable in less than 1 year is an often overlooked mortgage killer. Regretfully many self employed borrowers do not find out this is an issue until underwriting. Reasons include not providing full tax returns until late in the process or because loan officers overlook this key information. Why is it so bad? Because lenders must reduce the calculated income by this amount since the debt is due very soon. There must be enough funds to pay it off.
Luckily, there are usually solutions to this issue! Contact us to walk you through possible solutions.
Self Employed Mortgage Loan Tips
- Provide all schedules of tax returns
- Returns provided must be filed with the IRS
- K1’s should be provided no matter the percentage of ownership
- If taxes were owed on tax returns provided, supply proof paid in full or payment plan **
** If in an IRS payment plan, request a copy of the pay history, payment requirement, and balance
Self Employed Mortgage Reduced Documentation Approval
Yes! There is such a thing as reduced documentation for business owners obtaining a self employed mortgage loan. Note that the above list describes standard self employed mortgage loan documentation. Plus, a little more just to cover most situations. Although, stronger credit, down payment, and/or assets often allow for reduced documentation. Reduced documentation may include only 1 year of tax returns which is possible on Fannie Mae and Freddie Mac conventional loans and potentially FHA loans.
IRS Transcripts – 4506T Request for Transcripts of Tax Returns
Keep in mind that in order to use income reported on a tax return, lenders must verify the accuracy with the IRS. Meaning that a borrower cannot and should not provide a made up return that has not been filed with the IRS. This is where problems will arise. Here are issues we have seen after receiving transcripts from the IRS so that you can avoid them.
- No record found – Tax returns provided were never filed
- Borrower provided returns do not match IRS records
- No record found – Returns were just filed
- Taxes are owed
Fannie Mae states that the most popular type of mortgage fraud is income fraud. Lending agencies push lenders to pay attention to the red flags and the above are examples of some. These are the purposes of lenders requesting transcripts from the IRS. Keep in mind that transcripts may take 2 – 8 weeks to become available. This can cause issues with a mortgage. But, an alternative solution is to request an IRS stamped copy of your filed returns!
Self Employed Mortgage Loan FAQ’s
Finally, knowing the answers to these questions up-front will provide your loan officer with crucial information that helps with understanding the business, possible solutions, and potential hurdles.
- Is the business a sole proprietorship, LLC, C Corp, or S Corp?
- What is the specific name of the business?
- Is there more than one business? Answer questions for each business
- When did the business officially open?
- When did you file each of your most recent returns?
- Do you owe taxes for any years?
- Do you have a separate bank account for your business?
- What percentage of the business do you own?
- If an LLC or corporation, what state was it formed or filed in?
- Does the business pay any personal debts directly to the creditor for the last 12 months?