Mortgage Basics 3: Self employment
I'm self employed, can I get a home loan?
You can absolutely use self employment income to qualify, BUT there are a few important things to know BEFORE starting the mortgage process or home shopping when you are self- employed.
What determines being self employed?
If you are either paid with 1099's instead of w2's, file a schedule C for your business or 1120 tax return forms for a corporation or 1065's for a partner ship: then a lender will probably consider you to be self- employed.
What's the big deal?
If you are self- employed, the lender will most likely take an average of two years income.
Net or gross income?
With w2 employees the lender will take the gross income, self- employed borrowers aren't so lucky . . .
The lender will take the net tentative profit after deductions and write offs for qualifying income.
For example: If your business made $150,000 in gross receipts or sales, but you wrote off $100,000 in business expenses (cost of goods/materials etc.) Your net income would be $50,000 for the year.
The lender will add back a portion of depreciation and business miles if you have written those off.
How does this affect ME?
If you are self- employed and wish to buy a home, I would strongly recommend limiting your write offs so it does not kill your qualifying income. A good idea is to meet with your CPA and have a sample tax filed and then have your lender see if you can qualify for the home you want off of those numbers, or if you need to write off less.
Remember, most likely you will be looking at a two year average of your income and write-offs.
Can I get around showing my tax returns to qualify?
You can do a "bank statement only" program that looks at the gross money coming into the bank statements over a 12-24 month period and use this as qualifying income.
What are the drawbacks to a "bank statement only" program?
Nothing in life is free . . . If you use a bank statement only program to get around showing tax returns, the lender will make you pay for it in the interest rate. You can expect the rate to be about 2-2.5% higher on a bank statement only loan. The benefit is it could possibly get you into a home if the net income on your taxes won't allow you to qualify.
For more info or tips on self employment home loans, lets talk! Give me a call or shoot me an email!