How do self employed buyers qualify for a mortgage?

Owning a business has lots of advantages, but one of them is usually not easily qualifying for a mortgage.  Obtaining a self employed home loan requires more documentation than a salaried employee.  But with knowledge and some preparation, qualifying for a mortgage is easier for business owners.

Self Employed Home Loan Documentation

Lenders are not able to figure a loan approval without tax return and potentially other documentation.  It is not as easy as a salaried employee stating a fixed income.  So have the following documentation ready at application for quickest results.  These will allow for up-front income calculation.  Therefore the self employed buyer will have more confidence in purchasing a home.

  • 2 most recent filed personal tax returns with ALL schedulesself employed home loan - how to prepare to talk to your mortgage lender
  • Last 2 years filed business tax returns for any businesses with over 25% ownership
  • K-1’s for all ownership of businesses no matter the percentage owned
  • Filed extension if applicable

Additional documentation may help in qualifying for a self employed home loan.  These items depend on the actual borrower’s business and debts.

  • 12 months cancelled checks for any debts reporting on credit but are paid by the business directly to the creditor.  This could allow debts to be excluded from a buyer’s debt ratio.
  • If an LLC or corporate returns have “mortgages and notes due in less than 1 year”, provide one of the following:
    • Proof that the loan is not due in less than 1 year
    • Sufficient funds in a business banking account to cover the amount listed

Keep in mind that in order to use income reported on a tax return, we will need to be able to verify the accuracy of income.  This is accomplished through tax transcripts with the IRS.  So if you are looking to use the most recent year tax returns, make sure that you have filed them with the IRS.  Plus, lenders need sufficient time to receive transcripts from the IRS which can take 2 – 8 weeks after filing.  IRS turnaround time depends on the time of year. We actually receive a lot of tax returns that have never been filed which cannot be used since they could be changed.  So make sure your returns turned in are the actual ones filed with the IRS.

Popular Self Employed Home Loan Application Questions

In preparation for a mortgage application, it is helpful to know answers to certain self employed type questions.  Knowing the answers to these questions allows a knowledgeable loan officer to determine documentation needed for preapproval.

  • Is the business a sole proprietorship, LLC, SCorp, C Corp, or other?
  • What is the specific name of the business?
  • When did you file the most recent tax return?
  • Do you have a separate bank account for the business?
  • What percentage of the business do you own?
  • If an LLC or Corp, what state was the business filed or formed?
  • Are there any personally guaranteed debts that are paid directly by the business for last 12 months?

Additional Self Employed Tips

 

Written By: Russell Smith

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