Income used to qualify a person for a mortgage must be verified and for those self-employed it may entail more documents than someone who has a regular W-2 wage earning job, but it shouldn’t be hard. While requirements vary by time in the occupation and entity, the usual rule is 2 years of tax returns and supporting documents such as 1099’s. If regular record keeping is done and all legitimate income is reported to the IRS, it is simply a matter of gathering all of the right materials to submit as part of the loan application.
Lenders like to see two year self-employed track record, but there are programs that make exceptions.
In some instances you might get by with just a one year history as a contractor or new business owner. If you acquired the business and while the business is new to you, it has a solid track record that you can prove by records and the trend since you have owned it is the same or better, you may just need to write a detailed letter explaining to the lender the situation. Here is a breakout by standard agencies. Note that any lender may have an overlay of more stringent requirements, even if the agency they are selling to or insuring through has a lesser requirement.
FHLMC, also known as Freddie Mac (Federal Home Loan Mortgage Corp) loans, when run through their automated underwriting system – LPA, will usually only require one year of business and personal tax returns when a business has been in existence for five or more years. They consider a borrower to be self-employed that has an ownership position of 25% or more in the company they work for. Loans not approved through the automated system and that qualify for a manual underwrite would likely have two years of returns required to support income.
FNMA, also known as Fannie Mae (Federal National Mortgage Association) loans, when run through their automated system, DU, may also require only one year of personal and business returns so long as they reflect at least 12 months of self-employment income. More often than not, even DU also requires two years tax returns, just like a loan that required manual underwriting would. A self-employed person is defined as someone who owns 25% or more of a business. Additional items like letters from an accountant, a copy of a business listing in a bonified directory, business license or registry may also be required.
FHA – The minimum length for self-employment under FHA is 12 months. They will allow income from self-employment for less than two years, but no less than 12 months, on a case by case basis so long as there is a demonstrated career path for at least two years. A person who was in school for a year to learn a trade and then entered into that trade as a 1099 contractor for a year could be considered. Also a person who worked in the field and then went out on their own, but hadn’t quite been on their own but had been in that occupation previously for a total of two years combined and this can be documented with paystubs, W-2’s and tax returns would be eligible for consideration. Note that less than one year of income in a new business would not meet the requirements. Tax returns and year-to-date income from the new business and covering the year previous – total of two years returns would be required.
VA – Loans insured by VA will require two years for self-employment and the corresponding two years of personal and business tax returns. A self-employed person is defined as someone who owns 25% or more of a business. Additional items like letters from an accountant, a copy of a business listing in a bonified directory, business license or registry may also be required.
USDA – These loans require a full two years personal and business returns for self-employed persons as well as a year-to-date Profit and Loss statement which does not have to be audited. A self-employed person is defined as someone who owns 25% or more of a business. Additional items like letters from an accountant, a copy of a business listing in a bonified directory, business license or registry may also be required.
JUMBO and other Non-conforming Loan programs – For full document loans a self-employed person is defined as someone who owns 25% or more of a business and usually 2 years of personal and business tax returns are required. Additional items like letters from an accountant, a copy of a business listing in a bonified directory, business license or registry may also be required.
Some Jumbo and non-conforming loan programs may allow income from self-employed borrrowers to be based on earning trends that are verified by 12 months bank statements rather than tax returns. Or they might just require 2 years of 1099’s or a Profit and Loss prepared by a CPA or Enrolled Agent covering 24 or 12 months. These portfolio and irregular programs are investor specific and quite varied in their requirements. Because they may change in availability based on the market and funds, it is best to check with an actual lender or have a broker shop for you on the options that might be available for these more outside the standard box programs.
Being self-employed is somewhat the same as owning a business – you can buy a home with 1099 income
A person that works on a contract, or isn’t W-2’d is technically self-employed. Typically employers may be short term or not pay benefits and issue a 1099 instead of a W-2. If a 1099 employee files a Schedule C, or is a an LLC with a single member they are considered a sole proprietor. It would be up to the individual to determine in light of the IRS regs what entity best fits their situation. In the case of a Schedule C filer or an LLC single member filer, that person would own 100% of their “business,” even though they aren’t perhaps running a company with employees or a separate building. From a mortgage lending standpoint that self-employed person would be a business owner.
There are other business entities like a Partnership, Subchapter S Corp or a regular 1120 Corp which are more common for larger entities and may often have a few or many principals in the ownership. From a lender’s standpoint, a borrower owning 25% or more would be considered self-employed as an owner and even if they were receiving a W-2 and all of the amenities that a regular employee might enjoy as part of their employment, they would need to provide documentation showing company financials since 25% is a significant responsibility. Less than that, they would just need to provide regular employment documentation and could be verified as a wage earner rather than self-employed.
Overall the factors that a lender wants to verify and you are providing a picture of is:
- Stability of income
- Nature and locale of the business the borrower is in
- Understanding the demand for service or the product offered by the business
- Financial strength of the business
- Will the business continue generating adequate income so that the borrower will be able to make their payments on the new mortgage
- How long the self-employment has been in place/age of business
In conclusion, there is nothing harder about getting a mortgage loan if you are self-employed, though there may be more paperwork and if you can’t fit into one of the regular boxes because what you report to the IRS isn’t as much income as you believe that you enjoy, you might have to take a different kind of program that accommodates your documentation. With lending you always have to be able to back up your numbers with verifiable sources. When you provide tax returns, the lender will order transcripts from the IRS to verify that you have filed the returns that you have provided and that they match.
Every mortgage loan program is available to those who are self-employed, so long as you can provide the documentation to support your income, just as a regular wage earner provides W-2’s and paystubs. Check with your lender for actual requirements on the program you choose as you move forward in your home purchase.
Self-Employed Income requirements will provide you with more information on specific types of self-employed situations, documentation and requirements.
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