Is qualifying for a mortgage difficult if you’re self-employed?


emplpoyee or self-employed booksHow do you qualify a person for a mortgage when they’re self-employed? Are there simple rules for self-employed borrowers to follow that make the process less difficult? And the answer is—the rules are the same, yet different! Self-employed borrowers may have more paperwork, but the overall goal is the same – determine the income that can be used to qualify.

Self-employed borrowers are individuals that have a 25% or greater ownership interest in a business, or borrowers that earn income reported on a 1099 form rather than a W2. The income is reported on the individual’s federal tax return under schedule C, or may flow from other corporate filings to schedule E.   Self-employed borrowers need to manage their own withholdings for payroll taxes and also manage their own daily expenses. The tax return documentation that will be requested from them will start with the personal return, but may be a combination of personal and business/corporate. When the returns are well detailed and all schedules are provided, arriving at usable income is not a hard task.

We generally require a two year history of earnings and look for stability and continuance. This requires two years of filed personal and business returns, and a year-to-date profit and loss statement. The income that we use for mortgage qualifying starts with the actual bottom line, or net, income that is reported. When analyzing the returns, we carefully review all items taken as expenses against gross income. Some items, like depreciation, amortization, or the depreciation portion of the vehicle mileage deduction used as expense, can actually be added back to qualifying income. Finding all the income needed for the file is dependent upon how well the tax preparer has reported the details of income and expenses on the return.

To be, or not to be, self-employed is a personal decision. A great number of the borrowers we work with are self-employed. It may take a little time and effort to get all the information lined up in a way that is clear to the underwriter, but we understand how the math works and can tell you if the income you have supports your transaction. – Randy Cullen, NMLS #326128

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