Many self-employed business owners today are faced with two dreaded phrases from a mortgage lender. “Your debt ratio is too high”. The other is “You don’t report enough income on your tax returns”. Now, if a borrower reports no income or reports losses on the tax return as self-employed, options are limited. But there are a lot of ways to get a self employed mortgage loan.
Self Employed Mortgage Tricks
First of all, a business owner should not try to figure mortgage income from the tax returns. Lenders look at self employed mortgage income differently and it isn’t just the bottom line. Actually, there are many figures that may be added or subtracted to
the bottom line. This is where an experienced self employed mortgage lender helps. We are going to dig deep to see if a mortgage loan approval is possible. But keep in mind that the best way to get an accurate approval is to provide complete documentation up-front!
Qualify With One Year of Tax Returns!
In a self employed mortgage search, the first request will be 2 most recent years of tax returns. But there are programs that allow for using just 1 year of tax returns. That’s right, using the most recent filed tax return is possible! For instance, on a Freddie Mac conventional loan, it is possible to receive a mortgage preapproval that requires just one year. Certainly the chances of this approval improve with higher credit scores and overall strength of the file. Using one year of tax returns works for either newer businesses or a business that had a tough prior year.
Adding Back 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. But for the most part, there are some deductions which could be added back. 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. Both may be added back to the bottom line. Additionally, part of the business miles may be added back to income. This is accomplished by multiplying the IRS mileage depreciation rate times the business miles. Then, occasionally “other expenses” may be added back. These other expenses that could be added back include amortization expense or a one-time expense. A one-time expense could include a vehicle purchase, theft or storm damage, or a remodel of a business.
Excluding Personal Guaranteed Debts Paid by Business
Ok, what if the income is now figured and the debt ratio is still too high? That’s where proving the business pays debts can help in a big way. For instance, a car loan or credit card paid by the business may be excluded from the borrower’s debt ratio. So this could be big time. In order to exclude these debts, the following must be done:
- Debt must be paid on-time
- Provide last 12 months cancelled checks from business
- Business must have paid the debt directly
- Some loan types require the debts to be included in the business returns
- Must have separate personal and business bank accounts
PMI Strategies May Help Self Employed Mortgage Qualification
Let’s say a little lower mortgage payment would help in qualifying. Or maybe a buyer just wants a lower payment. Then using a PMI strategy could help lower the monthly payment. Therefore the borrower’s debt ratio is lower, which means better qualification. PMI doesn’t have to be monthly on a conventional loan. Alternatively, PMI solutions could include lender paid PMI, single premium PMI, or even split PMI. 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. Not all loans allow for this, but when allowed, it may get a buyer into a home. This seems to happen more often on a VA loan. Check out one of our articles which explains how this sales concession works for VA buyers.
Strong Borrower Profiles Improve Chances of Self Employed Mortgage Approval
Yes, lenders have maximum debt to income ratios but there are many other factors in mortgage approvals. In order to improve chances of an approval, there are characteristics that will definitely help. High credit scores, larger down payment, and asset reserves after the closing help tremendously. Mortgage loans start with an automated preapproval. These automated approvals weigh many qualities of the loan and then makes a decision. Strong features will often help a buyer’s qualification even at higher than normal debt ratios. Conversely, a lower credit score or low assets are negatives which may require a lower debt ratio for qualification. So basically the better the credit, assets, and income, then the better chance of approval or maybe even exceptions.
Self Employed May Add a Co Borrower to Qualify
So what if all of the above self employed mortgage tips still leave a buyer short of qualifying? Well, most mortgage loans will allow a co borrower that will live in the house. Plus, some loans will even allow a co borrower that doesn’t live in the home. This is called a non-occupying co borrower. In these cases, the primary occupying borrower doesn’t even need to have an income. So 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.