When it comes to getting a mortgage, business owners feel like an ant. Then, the mortgage lender uses the sun and a magnifying glass on that self employed ant. Basically, business owners feel picked on. A common complaint is, “A lender said I don’t report enough income. I make plenty of money, but it just doesn’t show on my tax returns.”
While that may be possible, we choose to use our experience to dig deep and find solutions for our self employed borrowers. Luckily, we have many self employed mortgage options available. Each option has its own advantages which include low or no money down, one year tax return approvals, higher debt ratios, exclusion of business paid debts, and more. There are 8 key areas to help business owners buy a home:
Self Employed One Year of Tax Returns!
The most popular, lender requested item from self employed borrowers would be the 2 most recent tax returns. Then, the lender calculates an income by averaging the two years together, but keep in mind that it isn’t using the gross income. Rather, it is using the net profit or loss, plus or minus certain allowable items. Although, it makes sense for lenders to look for consistency, a low year could really hurt the average. Fortunately, there may be a one year tax return solution.
That’s right! A one year tax return may be all that is needed for self employed mortgage approval. In order to use just one year, our automated pre-approval must require only one year. To achieve the one year returns approval, there must be sufficient strengths in the file. For instance, strong assets, credit score, time on job, and equity improve the chances. Fannie Mae and Freddie Mac conventional loans offer the one year tax return loan approval.
A borrower signed, year to date profit and loss statement is also required. It is to insure that the business income is on tract for the same or better trend as the previous year. Do you think that one year of tax returns would help? Give us a call and have your documentation ready for quickest and most accurate response.
Adding Back Self Employed Deductions to the Bottom Line
Again, don’t try to figure out the numbers yourself! The actual self employed income may be much different than the tax return income. Actually, it could be better or worse. Each of the mortgage agencies have differing requirements for calculating self employed income. Adding back some deductions is a common option. These could help a business owner qualify for a mortgage. First is depreciation or depletion. Businesses that own property, vehicles, or equipment may be able to add back right much. Each may help the bottom line.
Additionally, business miles may be added back to income. The IRS offers a mileage depreciation rate. This offers the ability to add back a portion of the business miles. Occasionally, it is allowed to add other expenses to the bottom line profit. Other expenses include amortization expense or a one-time expense. One-time expenses could include a vehicle purchase, theft or storm damage, or even a business renovation.
Excluding Personal Guaranteed Debts Paid by Business
What if the debt to income ratio is still too high? The next self employment mortgage solution is excluding debts paid by the business. It is common for business debt to show on a borrower’s personal credit report. Thus, mortgage lenders count it against the borrower. The debts may be excluded if the business pays any debts. For instance, a car loan or credit card paid by the business may be excluded. So, this could be big time. In order to exclude debts:
- The debts must be paid on-time
- The business must provide the last 12 months cancelled checks
- Business must have paid the debt directly
- Included in business tax returns
Think this could help? Gather proof that the business has paid the debts.
PMI Strategies May Help Self Employed Mortgage Qualification
What if the debt ratio is still a little high or the buyer just wants a lower payment? Then using a PMI strategy could help lower the monthly payment. There are PMI options which provide alternatives to the traditional monthly mortgage insurance. Lower mortgage insurance = lower monthly mortgage payment = better qualification. Conventional loans often allow for a single up-front mortgage insurance premium, split PMI (some up-front and a smaller monthly amount), or even lender paid PMI. Lender paid PMI involves a slight increase in rate to cover the mortgage insurance. Typically, resulting in a lower overall monthly payment. Learn more about PMI alternatives and strategies in another of our helpful articles.
Use Sales Concessions to Pay Off Debt
A little known trick is to ask for a sales concession to pay off a debt. That’s right! If a Veteran, a VA home loan allows the seller to pay up to 4% of the sales price in sales concessions for the buyer. An allowed use of the sales concession is to pay off buyer debts. Maybe there is a car loan payment keeping the buyer from qualifying. This self employed mortgage strategy could save the day! Check out one of our articles which explains how this sales concession strategy and more could help your self employed mortgage approval.
Student Loan Debt Keeping You From Buying a Home?
This is probably the largest growing sector of personal debt in the U.S. Not only is it tough on a household’s personal budget, it may also cause home purchase qualifying issues. Business owners are no different and may have student loan payments for themselves or children. Luckily there are guidelines which treat certain student loan payment plans in a way that is advantageous for home buyers.
Some loans make it tough by using 1% of the student loan balances in the debt ratio calculation. On a $100,000 student loan balance, the required payment may be $100. Yet, the mortgage program may require lenders to use $1,000 (1% of the balance) as the payment! But, other programs offer creative, lower payment options to aid in qualification.
Self Employed Mortgage Strength of File
Debt ratio is not the only qualification factor. Some borrowers are approved at 50 – 55% debt ratio. Where others may only achieve approval at 41%. Why? Because the overall strength of the buyer matters. So, what makes one buyer stronger than another?
- High credit scores
- Assets – include all funds including retirement
- Using own funds rather than a gift
- Lower debt to income ratio
- Higher down payment
- Time self employed
So basically the better the credit, assets, and income, then the better chance of approval or maybe even exceptions.
Add a Co-Signer to Help Qualify for a Self Employed Mortgage
What if you tried everything above and still no approval? Well, most mortgage loans will allow a co-borrower that will live in the home. Plus, some loans will even allow a co borrower that doesn’t live in the home. Otherwise known as a non occupying co borrower. In these cases, the primary occupying borrower doesn’t even need to have an income. This even works if the buyer just started a business and has no income. In other words, the co borrower could carry all debts for both borrowers plus the new house payment with sufficient income.
Keep in mind, all borrowers are on the hook for the debt and pay history on credit. We mention this because so many co signors believe they are not responsible for the debt. This is especially common on car loans. We hear, “That isn’t my debt or responsibility because I am just a co-signor.” There are ways to prove the other person has a 12 month history of on-time payments which could exclude the debt. But, it is the co signor’s debt too.
Self Employed Buyer First Step
Hopefully, we have provided helpful information you may not have heard from other lenders. Although, it is still very important to get a mortgage pre approval. As a business owner, it is even more important. Calculating income isn’t as cut and dry as a salaried W2 buyer. So, let’s have a discussion of goals and actual qualification.