There are more than 14 million self-employed mortgage borrowers in the US, and fortunately for them, it is getting easier to get a no-tax return home loan. Generally, guidelines in the last few years are getting easier for getting a home loan for the self-employed.
For instance, you may only need a single year of tax return documents to prove your income, if your application qualifies for automatic underwriting. The new guidelines are also easier on people who moonlight. That is, they have a second income from a non-salaried business. They also do not need to document this income if they are able to qualify for the home loan based upon the income from their main job.
More on Mortgage Approvals for the Self Employed
Any time you want to buy a home or refinance, you have to go through certain steps as a self-employed borrower. Generally, you must document your income, investment balances, and debts. Lenders also want to see your employment history and will verify your credit.
Based upon the information you submit; the underwriting system will give a response in a few minutes. It may approve, decline or refer the loan for manual underwriting. If the automated underwriting system approves you, the human underwriter will verify the documents you submit to ensure that they match all the information on your application. The automated approval can be a blessing for a self-employed borrower seeking a no-documentation loan.
One of the common problems for self-employed applicants is that they may say that they earn $5,000 per month, but their taxable income only shows on their tax return as $3000 per month. Underwriters will use a rather complicated system to come up with what your qualifying income is as a self-employed borrower. They will begin with your taxable income and add in certain deductions, such as depreciation, as this is not a real expense that comes from your bank account.
They also might take out windfall income, if some of your income does not seem to be ongoing and stable.
Your lender will also look at any assets you have to ensure that your down payment is coming from a legitimate source. They do not want you to empty your savings account to make a down payment. That could put your business and your mortgage at risk. They also will ensure that you do not have loans that are undisclosed. For instance, if your bank account shows a large deposit that was made in the last two months, the underwriter may want you to prove where that money came from.
Also, you could have to show other documentation, such as a business license or an official statement from your CPA that states what your taxable income was last year.
Generally, you will need to show at least one year of tax returns to get a home loan as a self-employed borrower. There are a few lenders out there that may have loans that are based upon your bank statements alone. These loans are harder to find, and you will pay a higher interest rate. Many lenders may require you to have two years of tax returns.
If you need one year of tax returns, that return will need to show 12 months of self-employment income that is high enough to pay for your mortgage and other expenses.
After the underwriter gives your no tax return loan the green light, you have been approved for credit. This means that you can get the loan if the property you want meets the requirements of the lender. If you have decent credit, you should be able to get a home loan as a self-employed borrower if you have enough documented income to show that you can afford the loan.
Many lenders want to see that you have 24 months of self-employment history to approve you for a no-income loan. However, Fannie Mae says you might qualify for a home loan with only 12 months of self-employment if you have years of earlier experience in the field. Also, your income will need to be at least as high as what you earned in that field earlier before you started to work for yourself.
A key requirement for getting a home loan as a self-employed borrower is that your income must be stable and consistent. If it is not regular and reliable, it cannot be used to get a mortgage. However, if your income does go up and down a lot, you may be able to qualify still if you show several years of tax returns that show income ‘highs’ that are elevated enough to support your mortgage payment.
If you are a self-employed borrower, you probably can get a home loan as loan as your credit is decent, and you have enough documented, stable income to pay the mortgage.