BACK
Jon Shrum
Jon Shrum
President / KMC Group Inc.
NMLS #335447
ARTICLE

Self-Employed and Getting a Mortgage: What You Need to Know

Self-Employed and Getting a Mortgage: What You Need to Know

‍Millions of Americans have taken control of their careers as entrepreneurs and freelancers. Unfortunately, traditional mortgage rules can deliver an unpleasant dose of reality for aspiring homeowners who are self-employed when it comes time to buy a house.

If you are self-employed, either full time or part time, and have plans to purchase or refinance a home, there’s a lot you need to know to prepare for the potential challenges ahead.

Who is considered self-employed

For mortgage lenders, the standard definition of self-employment is having 25% or more ownership in a company that you derive income from. This includes all types of businesses, from sole proprietorships to LLCs and corporations.

Independent contractors and freelance workers may be considered self-employed as well, even though you might not have ownership in the company that pays you. If you receive 1099s at the end of the year, chances are you are self-employed.

Why it’s harder to get a mortgage when you’re self-employed

For traditional employees, lenders use the gross income reported on a W-2 tax form to evaluate you for a mortgage. For example, if you make a salary of $60,000 a year, your lender can use $5,000 per month to qualify you for a mortgage loan.

For self-employed workers, the calculations are much different. Lenders take into account your business expenses when determining your income.

Let’s look at that same $60,000, only this time if you earned it as your own employer. Before the lender can determine your qualifying income, they have to look at all the expenses you are deducting on your tax returns — including meals and entertainment, cellphones, internet service and mileage for your vehicle.

Assuming you have $20,000 per year in expenses for running your business, a mortgage lender will deduct the $20,000 from your $60,000 gross income, and the $40,000 that’s left is the income that can be used to qualify. That is your net income.

If you are self-employed, you would only have $3,333.33 per month of income that could be used to qualify for a new mortgage. That equals a much smaller house, or a larger down payment.

What lenders are looking for if you’re self-employed

You can only prepare properly if you have an idea of what lenders look for when considering your application for a mortgage. Provide extra explanations upfront for any details about your business income that will keep them from guessing, and give them more evidence that you have the ability to repay the loan.

Large increases or decreases in your income

Lenders will usually average your net income over a two-year period to determine how much income to use to issue a loan. Any large increases or decreases can be causes for concern and result in the decline of your loan application.

The biggest red flag for most lenders is a 25% or more decline in self-employed income from the prior year. The explanation may be simple: You might have started up a new branch of your company and incurred a lot of expenses that won’t continue in future, or perhaps you changed the structure of your company from a sole proprietorship to a partnership.

The important thing is to provide an explanation, and preferably a letter from your CPA for any one-time tax losses you were taking. That way, the lender understands the company is in good financial shape and the losses were not due to hardship.

The same is true for large increases. Unless there is an explanation or documentation that the most recent year’s increase in income was due to something that will continue into the future, the lender will probably average the most recent year against a lower prior year to be conservative.

Keep in mind they are looking at the income and expenses for both you and your business. If your personal income has risen substantially in the past year, but there was also a significant drop in your company’s earnings, lenders will want to know what’s going on with the company.

How long you’ve been self-employed

If you’ve been self-employed for more than five years, there are programs that will allow you to get approved with just your most recent year’s tax returns. If you have one rough year, but have been in business for decades, an underwriter may be willing to make an exception if you can document prior year’s earnings, and show that the current year’s earnings are back on track.

Business funds for down payments on a home

Combining your business funds with your personal money can get tricky in mortgage lending. Lenders will want you to verify that using those funds won’t affect business operations or cash flow, and they may want your tax professional to write something to that effect.

If you can come up with your down payment without accessing the company’s asset accounts, lenders may waive the requirement for the business tax returns.

Type of business you are in

If you work in a business or industry that has seen rough days lately, or one that appears to be in early growth stages, lenders may scrutinize more carefully the reasons for your drops or rises in income. They might require more documentation or reduce the amount of loan they are willing to qualify you for.

Different types of loans for self-employed borrowers

Conventional

Conventional loans are generally the most sought-after to get the best rates and terms. Fannie Mae and Freddie Mac are the two of the largest purchasers of mortgage in the U.S. mortgage market and dictate most of the terms. Generally, they take into account the last two years of personal and business tax returns.

Freddie Mac makes an important distinction for business owners who are qualifying with a company that’s been in existence at least five years. The requirement for tax returns can be reduced to only one year’s worth of personal and business returns if you can provide a letter from your CPA or certified tax professional confirming your company has been in existence at least five years.

FHA

The FHA program requires the same two-year income history as Fannie Mae. However, since the credit score requirements are lower, self-employed borrowers may have more flexibility to get approved. Minimum credit scores can be as low as 580, versus the 620 required by Fannie Mae.

The requirement for business returns can be waived if your personal tax returns show your income has risen over the past two years, and none of the funds you’ll use at closing are coming from your business accounts.

VA

Self-employed military veterans will be required to provide the standard two years of tax returns, plus a year-to-date income verification.

The VA uses a “residual income” analysis, which looks at how much the veteran has every month after his total expenses including the new mortgage, are deducted from his net income. Depending on the size of the veteran’s family and the size of the house, self-employed military veterans may get the most flexibility in qualifying for a VA loan.

USDA

The USDA loan program offers loans for lower-income borrowers in rural areas. You might be surprised, though, by what properties in your area qualify.The standard two-year tax return requirements apply to USDA loan and underwriting and credit requirements are similar to FHA.

Final considerations for the self-employed mortgage applicant

First impressions are everything, and that’s especially true if you are self-employed and applying for a mortgage. If you know that your business had big changes in income over the past year, you have two choices: You can roll the dice and hope the numbers come up in your favor; or you can be proactive and provide explanations from your CPA and documentation to support all those changes. Regardless, you’ll want to work with a loan officer who has some experience with self-employed borrowers.


Source: Denny Ceizyk magnifymoney.com


Jon Shrum

Jon Shrum

President / KMC Group Inc. NMLS #335447
Want to learn more?
Schedule a free consultation!
Need some
Mortgage Guidance?
Need some mortgage advice? Schedule a consultation
jons@arborfg.com
Get your FREE mortgage payment estimate*
Start
*The mortgage payment quiz is for estimation purposes only. Qualification, rates and payments will vary based on timing and individual circumstances.
This is not a commitment to lend.
Privacy and Security Guaranteed
Question 
1
 / 10
Where are you located?
CONTINUE
What type of home are you purchasing?
Estimate your credit score.
CONTINUE
What is the purchase price of the new property?
$80k$2M+
CONTINUE
What is your estimated down payment?
0%50%+
CONTINUE
Where are you at in the property search?
Are you working with a realtor?
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
jons@arborfg.com
See if you're paying too much for your mortgage!
Start
*The refinance quiz is for estimation purposes only. Qualification, rates and payments will vary based on timing and individual circumstances.
This is not a commitment to lend.
Privacy and Security Guaranteed
Question 
1
 / 16
Where are you located?
CONTINUE
What type of home do you own?
Estimate your credit score.
CONTINUE
Please estimate the value of your property.
$80k$2M+
CONTINUE
What is the remaining 1st mortgage balance?
$0$300k+
CONTINUE
What is your 1st mortgage interest rate?
0%10%
CONTINUE
What kind of rate do you have?
What kind of rate would you prefer?
How will this property be used?
Do you have a 2nd mortage?
Would you like to borrow additional cash?
What is your average monthly income?
$0$50k+
CONTINUE
What are your average monthly expenses?
$0$50k+
CONTINUE
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
jons@arborfg.com
Isn't it time you made your HOME EQUITY work for you?
Start
*Arbor Financial Group is not affiliated with any government agencies. These materials are not from HUD or FHA and were not approved by HUD or a government agency. Reverse mortgage borrowers are required to obtain an eligibility certificate by receiving counseling sessions with a HUD-approved agency. The youngest borrower must be at least 62 years old. Monthly reverse mortgage advances may affect eligibility for some other programs. This is not an offer to enter into an agreement. Not all customers will qualify. Information, rates and programs are subject to change without notice. All products are subject to credit and property approval. Other restrictions and limitations may apply.
Privacy and Security Guaranteed
Question 
1
 / 10
Where are you located?
CONTINUE
Age of borrower
CONTINUE
What is your current property value?
$80k$2M+
CONTINUE
What is the balance of your mortgage?
$80k$2M+
CONTINUE
What type of home do you own?
Reason for Reverse Mortgage Loan?
CONTINUE
Estimate your credit score.
CONTINUE
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
jons@arborfg.com
Stop paying your landlord.
Start building equity.
Start
The Rent v's Buy quiz is for estimation purposes only. Qualification, rates and payments will vary based on timing and individual circumstances.
This is not a commitment to lend.
Privacy and Security Guaranteed
Question 
1
 / 10
What is your monthly rent payment?
CONTINUE
What's your monthly rental insurance?
CONTINUE
What's the price of the home you are considering?
CONTINUE
How much down payment can you afford?
0%50%+
CONTINUE
How long would you want your mortgage to be?
CONTINUE
What is your annual income?
CONTINUE
Are you a Veteran or spouse of a Veteran?
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
jons@arborfg.com
Your dream home renovation is only 2 minutes away
Start
*The mortgage payment quiz is for estimation purposes only. Qualification, rates and payments will vary based on timing and individual circumstances. This is not a commitment to lend.
Privacy and Security Guaranteed
Question 
1
 / 11
Where are you located?
CONTINUE
What are you renovating?
CONTINUE
How soon do you want to renovate?
What type of home are you renovating?
What type of loan do you want?
How much do you need to borrow for your project?
$80k$2M+
CONTINUE
How long do you need to pay off your loan (in years)?
1 year12 years
CONTINUE
Estimate your credit score.
CONTINUE
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
jons@arborfg.com
Let’s Calculate Your VA Loan Savings Today!
Start
*A down payment is required if the borrower does not have full VA entitlement or when the loan amount exceeds the VA county limits. VA loans subject to individual VA Entitlement amounts and eligibility, qualifying factors such as income and credit guidelines, and property limits. Arbor Financial Group is not affiliated with any government agencies. These materials are not from VA, HUD or FHA, and were not approved by VA, HUD or FHA, or any other government agency.
Privacy and Security Guaranteed
Question 
1
 / 10
What is your branch of service?
CONTINUE
Are you currently serving?
What type of home are you renovating?
Where are you located?
CONTINUE
What type of home are you purchasing?
What is the purchase price of the new property?
$80k$2M+
CONTINUE
Where are you at in the property search?
What is your full name?
CONTINUE
What is your email address?
CONTINUE
What is your phone number?
Prev
0
 %
Your information won’t be sold
Thanks for your
information request!
Need more help of your homeownership journey? Schedule an appointment today. Or contact directly:
Jon Shrum
President / KMC Group Inc. NMLS #335447
Schedule a consultation
Your information won’t be sold
1 Jon Shrum