Loan qualifying for the self-employed hasn’t gotten all that more difficult, it just feels like it has.
Self-employed borrowers historically, have always had a difficult time with the loan qualifying. Stated income loans used to be the main outlet for these folks. These folks tend to write off all business expenses, and after factoring in taxes, there is little income left over for qualifying purposes.
The best possible mortgage tip for self-employed borrowers would be to show an annual net profit and have large expenses on top of that. This is going create a compound effect for loan qualifying which will help the self-employed borrower get a mortgage.
Loan qualifying for self-employed borrowers breaks down like this:
-Schedule C. of the federal income tax return for 2009 and 2010
-Locate Line 31 net profit and loss
-add back to that figure line item number 6 non-recurring income or expense
-add back line item number 12 depletion
-add back line item number 13 depreciation
-add back line item number 24B meals and entertainment
-add back line number number 30 business use of home
-add back line item number 44a mileage depreciation
Now do this for the last two years and then divide by 24 (which represents two years). This will give you the amount of income we can use for loan qualifying. This is also how mortgage loan underwriters calculate sole proprietor Schedule C. Income.
Loan qualifying for self-employed borrowers can also involve rental properties.
This is great if you are sole proprietor, but what happens when you have a rental property or two? How is that income factored into the equation?
Locate Schedule E. of the last two years of federal income tax returns Rent and Royalty income
-Go to lines 3 and 4 Gross rents and royalties received
-add that to line item number 18A amortization/casualty loss
-add that to line item number 19 total expenses before depreciation
Mortgage lenders will be looking for two years of tax returns, both personal and corporate if there is a corporate tax return, a business license or a CPA letter verifying two years of self-employment as well as a current year-to-date profit and loss statement.
To get a home mortgage approved fast be prepared to show and paper trail everything. If there are business debts that show up on a personal credit report, documentation will need to be provided if those debts are to not be used in factoring into the debt to income ratio and subsequent qualifying ability.
Give me a call Scott Sheldon at 707-217-4000. I help with loan qualifying for self-employed borrowers.
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