As we are entering into pandemic manageability, one of the things lenders are still looking for as it pertains to self-employment borrowers is positive income from your tax return…
Both Fannie Mae and Freddie Mac and the FHA and the VA all want two years of tax returns. Lenders also these days request a year-to-date profit and loss statement. The request for a year-to-date profit and law statement is only to make sure that your current year-to-date income is consistent with the most recent year’s tax filing or that the income is the same or higher. If the p & L is lower that will present a problem to the lender because it will look like you have declining income Which gives them cause for potentially denying your loan application.
So that being said if you’ve been filing self-employed for the most recent last 5 years or longer you can provide your most recent one-year income tax return to the lender for qualifying for a conventional mortgage. This means for example if your 2020 return was good but 2019 was bad and you’ve been filing self-employed since 2015, the bad year is not requested.
So, what happens if 2019 was a good year and 2020 was bad because of covid. In 2020 many families across the country took an income hit. Maybe their business was shut down and there a particular field or in their industry, and they were not allowed to work. The government made those restrictions, and those restrictions caused a lot of income problems for a lot of families in the calendar year of 2020. Fast forward to today in 2021 you’ve already filed your 2020 tax return or a will by October 2021. Let’s say your income for 2020 was not so good. You will have a problem even if your p and L year to date in 2021 is higher.
So, here’s what you can do…
- Get a CO signer-Getting a CO signer provides additional income or an income or another borrower on the application that helps meet the debt-income ratio requirement. You can always refinance the CO signer off down the line when you show income.
- Pay off debt
- Change loan programs-example can you go from conventional to FHA or vice versa
- Put more money down
While it might not be the most pleasant thing in the world to have to do the reality of it is if you’re going to show big income to IRS, you’re going to have to write a check, or you don’t show big income to IRS and guess what? You still must write a check to go with a unique loan such as a bank statement loan. Either way, you’re writing a check so you might as well get a lower interest rate better term, and a more affordable sustainable mortgage payment based on the income reported.
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