When obtaining a mortgage, self-employed home buyers face more detailed underwriting scrutiny regarding their income. Conventional loans require analysis of the borrower’s net income as shown on their tax returns. This can cause two challenges to self-employed buyers.
Firstly, underwriters compare year to year tax returns. An income decline can cause loan denial. As an example, one of my clients flips houses. He wanted to buy a house in early 2016. His 2014 tax return showed strong income. He planned to sell two flipped homes in December 2015, but they were delayed about 3 weeks – until January 2016. The income from those home sales did not appear on his 2015 income tax return. Therefore, his income declined from 2014 to 2015, and he could not win conventional loan approval at that time. He had to wait 12 months. Then we won loan approval using a strong 2016 tax return.
Secondly, underwriters use the net income after business expenses to qualify a self-employed buyer. Smart business owners expense as much as possible to lower their tax payments. But the greater their expenses, the lower their net income, making it harder to qualify for a higher priced home loan. Conventional loan underwriting guidelines work directly opposite to smart business tax strategy. That can make it hard to qualify for the desired home.
We can solve these problems by using a non-traditional mortgage that defines income using bank statements. The underwriters determine income based on the statement deposit history. The underwriters can specify income using 12 months of personal bank statements or 24 months of business bank statements. Only 100% company owners can use business bank statements. Qualifying for this loan requires that the borrower has been self-employed for at least 2 years.
So what’s the catch? First of all, these loans typically require a 10% down payment – no 3% or 5% down loans. Also, these non-traditional loans carry higher interest rates than traditional loans. The borrower must decide if the higher interest payment is worth buying the house now. For someone with significant tax write-offs, it may make sense to continue saving tens of thousands in tax payments in exchange for spending a little extra per year on mortgage interest.
Do you know a self-employed friend or family member who wants to buy a home? If you do, please connect them with me. I will evaluate their ability to qualify for a traditional mortgage, and we will go that route if possible. If tax savings or declining income becomes an obstacle, I can work to put them into a home sooner rather than later using a non-traditional loan. With home prices and traditional mortgage rates rising, it may make financial sense to go ahead and buy now.
