I’m a self employed business. I make my own hours – so I can be at my daughters softball games on Thursday afternoons at 3pm, but I work most Saturday mornings because that’s when my clients are available and want to talk. I manage my own profit and loss and I have total freedom to manage my time and resources.
But how does that affect my ability to get a mortgage? The true, complete answer is “it depends.” That is usually the answer to most complicated questions. HEre, we’ll look at the high level of how self employment affects your mortgage loan application
1. Length of Self Employment. In order to use self employment income towards a mortgage, you have to have been self employed for the prior two years in a self employed capacity….Generally, there are specific situations when we can use 12-24 months of self employment to qualify for a home loan.
2. Verification of Income. The lender may verify a self employed borrowers employment and income by obtaining copies of individual tax returns, and sometimes business tax returns as well. When the borrower has two years of individual tax returns reflecting sufficient income to meet the mortgage obligations, teh requirement for business tax returns can be waived.
3. Analysis of Borrowers Personal Income. Including business income or loss as reported on the borrowers individual tax returns. This is done to determine the amount of stable and continuous income that will be available to the borrower. IF the borrower is using income not derived from self employment to service the mortgage debt, this may not be required.
4. Analysis of Borrowers Business Income. When the borrower is relying on self employment income to qualify for the home mortgage, the lender is required to prepare a written analysis of the borrowers ability to repay based on business income. Enter business tax returns. If this is the case, and you are using money you generate from your self employed business to pay the mortgage, the lender will likely require you to provide your business income tax returns.
5. Analysis of Use of Business Assets. When the borrower is using business funds towards the mortgage – either as downpayment OR to pay down debt to qualify; the lender is required to perform a business cash flow analysis. This is used to ensure that removing these funds from teh business won’t impact the ability of the business to meet it’s obligations. For example, if you are planning to take $100,000 out of your business to use as the downpayment for your personal home, the lender wants to ensure that removing that money won’t impact the borrowers ability to make payroll, or pay rent, etc. If this applies to you or your business, call me to discuss because there is a lot here.
6. Business Assets as Acceptable Source of Funds. Here, the lender is still required to determine that using business assets towards the mortgage won’t negatively impact the business. The borrowers name must be on the bank statements and the lender has to establish that the borrower is the business owner. Ownership is usually established via articles of organization or incorporation or other business related documents filed with a third party.
All of the above are not required on every self employed borrower. Think of these as gates that you have to pass through. If you successfully meet item numbers one and two, items three through six may not necissisarily be required.