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May 30, 2020
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Real Estate & Business

Scott Sheldon
How to get a mortgage when self-employed income is tricky
May 29, 2020

Not always, but traditionally, self-employed borrowers have a hard time securing mortgage loan financing. If you are filing self-employed and you are trying to get qualified for mortgage financing here are some solid tips to keep in mind…

Most mortgage lenders are going to require you to provide 2 years of federal tax returns. They take a blending of your most recent last two years on almost every mortgage program with a few exceptions that we are going to get into momentarily.

Here’s how this works. When you apply for a mortgage, the lender is going to require your two most recent years of federal income tax returns with all pages and all schedules including any applicable supporting K1’s and/or corporate returns.

If you are getting mortgage financing and your two years of most recent tax returns do not support enough income to qualify here is something to consider…

Let’s say your 2019 tax return is very strong but 2018 was very low, in order to offset the negative year you would have to show two years of income in one because the lender is going to average the returns.

This is if are were looking at a conventional loan if filing self-employed for less than five years or on an FHA loan..

If you have been filing self-employed for the most recent last five years, on a conventional loan only, you can provide only your most recent 1-year income tax return. This means is all of your previous years of income were very low, but your most recent year of income was very high you can provide your most recent year of returns only. This subsequently would allow you to potentially qualify for a bigger mortgage or for a bigger purchase price depending on what your financing objective is.

If your most recent year of income tax returns is not enough income to qualify following are other alternatives…

1. Get a cosigner -it can be anyone. Potentially depending on what kind of income you show in the future, you might be able to refinance that person off the loan down the line.

2. Pay the piper– remember you are choosing to be self-employed. Self-employed individuals typically pay more in taxes. It is the cost of being self-employed and not being a W-2 employee and having the freedom to set your own destiny at the expense of paying slightly more in taxes. As a result, stop writing everything off. The more you write off the last tax exposure you have resulting in less income.

3. Create an income stream depending on what kind of cash position you have in the bank you might be able to purchase an income stream such as if you lend money out, you can use that money repayment in the form of income so long as it will continue for 3 years or if you are age-eligible you might be able to purchase an annuity as long as it’s going to continue for 3 years and you meet all of the annuity guidelines.

4. Pay off debt – pay off all consumer debt. It is a ratio of 2:1 for every dollar of monthly expense you have it requires $2 of income needed to offset it. In other words, pay off debt giving yourself more income subsequently increasing your borrowing power.

All of the above ways may work in helping you get a mortgage more easily. Best to talk to a mortgage professional who can clearly articulate the pros and cons of each scenario.

 

Scott Sheldon is a local mortgage lender, with a decade of experience helping consumers purchase and refinance primary homes second homes and investment properties. Learn more at www.sonomacountymortgages.com.