Applying to purchase or refinance a mortgage is going to require you providing an ample supply of credit, cash and documentable income to support the loan that you are seeking. Contrary to popular belief a mortgage loan is not made against the property, but rather against your ability to repay. Here’s some things you need to know if you’re self-employed and desiring to borrow money on a mortgage…
Mortgage lenders are under a very tight microscope by Fannie Mae and Freddie Mac and are subject to extreme oversight. It’s an automatic that every mortgage company in America is audited. These audits are random and could be more frequent based on the lender’s financial rating. If a lender pushes the envelope too far audits become more frequent.
One such barometer of risk is income. When you’re a W-2 employee of a company that you do not own, you don’t have the ability to change your income and your income is not subject to market fluctuations based on the ebb and flow of business. Self-employment may well prove to be a lucrative could be a double-edged sword when it comes time to getting a mortgage.
One of the things as a self-employed business owner that you will face at some point over the course of your self-employment career is the ability to mitigate your personal financial risk. One such way to do that is to write off all your expenses.
If you’re self-employed here are Lending nuances you must know when applying for a mortgage…
If you have been filing self-employed tax returns for the most recent last five years, the mortgage company may be able to do your mortgage with the most recent one-year income tax return only and omit the last four years as long as you’ve been filing self-employed for the last five years. This will allow you to use the most recent year.
If you’ve been filing self-employed and it’s been less than five years filing self-employed the mortgage company is going to require averaging your two most recent years of income taxes. If one year is bad and one year is good your good year needs to be strong enough to offset two years in one, you heard that right which means you might have to pay the piper and pay more in income taxes.
If you were a W-2 employee and you bought a business and if you’re in the same field and the business has been in existence for two years you can use one-year self-employment income brand new one year out of the gate to qualify. This is a diamond in the rough for both an FHA loan and for a conventional loan.
Where people can get into trouble is when they are a W-2 employee then they go self-employed right out of the gate and they don’t have a tax return to support the income. The solution for mortgage then becomes waiting, getting a cosigner, or get a new W-2 job as new self-employment income with no tax return for support is unsubstantiated in the eyes of Fannie Mae and Freddie Mac.
When you’re self-employed you have as much financial responsibility to show as much income as you can and pay the same amount of taxes that you would as a W-2 employee. While you may be able to write off your expenses that doesn’t necessarily mean that you should especially when it comes time to getting a mortgage. The financial fisk you will bear by writing off all your expenses is not being able to purchase a house, not being able to refinance a house, not being able to take on certain types of credit which could otherwise help your long-term financial bottom line.
Best advice? Talk to an experienced mortgage lender that thoroughly understands every self-employed mortgage intricacy. Next to that, the best thing that you can do is show as much income as you can on paper and responsibly pay the federal taxes associated with your earnings.
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