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Being a Self-Employed Borrower Doesn't Have to Be Scary
There are different options for self-employed borrowers to consider as they begin the process of getting qualified for a mortgage loan.
Homebuyers requiring financing are asked to provide extensive documentation regarding their employment, income, and assets. Ever since the "Mortgage Meltdown" occurred from 2007-2009, the mortgage industry has been looking at these documents more thoroughly and critically. A loan officer today will often compare his or her job to that of a private detective.
In most cases, a homebuyer's income and assets are easily calculated and documented, however self-employed borrowers are faced with additional scrutiny that can often result in a lower "qualifying income" than these borrowers might expect.
The sub-prime mortgage era presented alternatives for self-employed buyers. There were "Stated Income," "No-Doc," "No Income-No Asset" and other variations that allowed buyers to avoid the more strict conventional underwriting guidelines that applied to self-employed borrowers. We're just now starting to see some alternatives returning to the market, but today borrowers are asked to put down more money and pay a higher rate whereas in the sub-prime era there was very little premium added for these special loan products.
Borrowers are considered self-employed if they own 25% or more interest in a business or if they are 1099 employees who file a Schedule C. Self-employed borrowers are required to have a minimum of two years consecutive self-employment in the same business and geographic area.
Typically, two years of income tax returns are required for analysis, however automated underwriting findings may allow for review of just one year's returns.
Business income is averaged over a two-year period using Federal Tax Returns. In the case of declining income, significant compensating factors must exist to consider the income in the qualifying ratios. A significant decline in income is not acceptable, even if the current income and debt ratios meet agency guidelines.
The type of business (sole proprietorship, partnership, or corporation) determines how the income is calculated. The qualifying income will be much closer to the Net Income than it will be to the gross earnings, in most instances. This is where self-employed buyers can find themselves with less buying power than expected.
The one "tip" I could offer self-employed borrowers is that they should be conscious of the impact aggressive business deductions and tax write-offs can have on their qualifying income when it comes time to buy. While that may result in higher income taxes, it could also result in qualifying for their dream home.
And, of course, it is always best to get pre-qualified with a reputable lender before beginning your home search.
..."You've got a Friend in Real Estate"
Jarod Tanksley 615.403.8265
Brentview Realty 615.373.2814
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