When it comes to obtaining a home loan and being self-employed, the rules of the game have changed in recent years. In this article, we will talk about what it takes in the current market, to obtain a home loan, if you are self-employed.
In today’s lending environment, almost anyone applying for a loan will have their tax return transcripts verified by the IRS for a new Conventional, FHA or VA loan (certain VA and FHA refinances are the only exception).
For someone who works a regular job where they receive a W-2, this will not mean a whole lot, as their tax returns will most likely just contain some standard deductions.
However, if you are self-employed in that you own your own business or even if you just receive 1099 income, there will most likely be additional deductions on your tax returns which can affect your ability to qualify for a home loan.
With Self-Employed Borrowers, the only way to verify income and expenses is through an Individual U.S. Tax Return and the Tax Returns filed by the business they own if they exist. This is true whether that business is a Partnership, Corporation, (S, C, or LLC), or otherwise.
These returns will be analyzed and any business expenses or write offs associated with and claimed on your tax returns will be deducted from your income for loan qualification purposes.
Or in other words, you’re qualifying income that you can use will often times be very close to your adjusted gross income, as claimed on your tax returns over the past two tax years filed.
In addition, you will also need to show a two year history of self-employment and your most recent two years tax returns will often times be averaged to compute your average annual income.
However, if your income declines from one year to the next, you could also have your income adjusted down to your most recent years filed income as well.
In the end, if you are self-employed and trying to qualify for a new home loan, it is best to sit down with a licensed mortgage lender, such as Strategic Mortgage and have your tax returns and documentation reviewed properly so that you can properly pre-qualify for a new home loan.