By Dwayne Holt, Mortgage Lending Director
For most mortgage lenders, the application review process starts by comparing the borrower’s proposed housing payment with his or her monthly income. But that’s not easy to do if the borrower doesn’t get a regular pay stub. Many freelancers, business owners and other independent workers are considered “self-employed.”
If you (or someone you know) would fit in that category, income is determined by reviewing documents like profit-and-loss statements, 1099s and tax returns. Here are some considerations to help those self-employed individuals figure out if they can buy or refinance a property.
Defining Self-Employment
Lenders have a basic definition for a self-employed borrower: anyone who receives more than 25% of annual income in non-salaried pay. You can probably be considered “self-employed” if you:
Required Documentation for Mortgage Applications
To begin, a lender will want evidence that you’ve been self-employed for at least two years, which means documentation in addition to your business license. The following will likely be required:
Issues in Tax Returns for Mortgage Lenders
Lenders look for some key information and indicators when reviewing tax returns related to a home loan application. Common issues for self-employed individuals include:
Calculating Self-employed Income is Complicated
Self-employed income calculations often mean a judgment call by the underwriter, especially for borrowers who have multiple businesses or properties, or whose business may be non-traditional.
That’s why it can be extremely helpful to give your tax returns to a mortgage professional for review. Most lenders offer this service for more complicated tax returns, sometimes even before the official mortgage application. This review establishes a starting point, since the underwriter can determine qualifying income ahead of time.
The self-employed borrower does endure more scrutiny that the standard employee with a pay stub. If you’re self-employed and begin your loan application with the proper expectations, you’ll close your mortgage loan with very few surprises.
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