Doom & Gloom for self-employed borrowers?

A double edge sword cuts between the tax advantages provided by the IRS and the income required from a lender to qualify for a mortgage.

Qualifying for a mortgage is harder for self-employed borrowers compared to W-2 wage earners.

Program guideline rules from Fannie, Freddie, and Penny are applied to determine a borrower's income for conventional or government loans.

There are tax advantages for self-employed individuals or business entities. Unfortunately, self-employed borrowers are at a disadvantage of qualifying for mortgages that offset the benefit of having business expenses or losses.

Self-employed borrowers typically show losses on the available IRS tax schedules, and the bottom line is the adjusted income after the business losses. Most often, small businesses provide very little income, and this is the problem.

W-2 wage earners experience the opposite effect. The IRS appreciates the taxes you pay, and verifying income is easier for a mortgage. The gross income is applied to qualify and not after business losses or deductions. Unless you have a small business in addition to your W-2 income, then the same rules of self-employed borrowers would apply.

Other non-qualified mortgages can remedy this for self-employed borrowers. I have discussed the non-QM products in one of my previous blogs. FundLoans is a secondary lender I use, and they provide the pricing and guidelines for all the non-QM products on their web page.

FundLoans website (click on image)

The non-QM products provide loan products that allow bank statements to be used instead of tax returns. The options include 2-mo., 3-mo., 6-mo., 12-mo., and 24-mo., personal and business bank statements. Inconsistent and large deposits will be scrutinized and require additional sourcing.

One of the more recent loan products in the industry for investors with a real estate owned portfolio provided on an IRS Schedule-A form, factor the income using a debt-service coverage ratio (DSCR).

These are all solutions for self-employed borrowers, but they come with an additional cost to the rate and terms. Additional funds are necessary for the down payment. The collateralization is known as the loan-to-value (LTV). A 20% down payment = an 80% LTV and this is usually the maximum LTV with these types of loans.

Are you self-employed and need help figuring out the income an underwriter will use based on your tax return? I am also a certified tax professional and can help the most complicated business structures with this situation.

Do you have any questions or loan scenarios you would like to discuss?

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