Self-employed mortgage applicants must prove stability of employment and income, usually going back two years. This is a bit tougher than it is for regular salaried employees.
Traditionally, mortgage lenders have required two years federal income tax returns in securing a mortgage for purchasing or refinancing real estate. There’s been changes to the way mortgage lenders underwrite mortgage loans.
Fortunately, there is a way to use just one year of tax returns to qualify for a mortgage. This can help newer business owners, as well as those who experienced a down year in the past.
Whether you are looking to buy a home or refinance one, you may be able to qualify by showing only your most recent year of income. Check out this article by The Mortgage Report’s Adam Lesner for more.
Getting Approved As A Self-Employed Applicant
Generally, a self-employed borrower is any individual who has 25% or greater ownership interest in a business.
According to conventional mortgage guidelines published by Fannie Mae, underwriters consider the following factors to approve a self-employed borrower.
- The stability of the borrower’s income
- The location and nature of the borrower’s business
- The demand for the product or service
- The financial strength of the business
- The future outlook of the business
Two points stand out here when getting approved as a business owner: stability and consistency.
The way underwriters measure stability is by looking at length of history in that business specifically, and in that field.
They typically want to see a two-year history in the respective industry. This is where you may be granted an exception if you haven’t been self-employed the whole two years in that line of work.
Ask The Lender To Use Different Approval Software
In some cases, the underwriter won’t ask you to provide a full two years’ worth of tax returns.
Most applicants’ files are run through computerized underwriting systems, then verified by real person. The underwriting software, in some cases, will ask for the most recent year of tax returns only.
The one-year requirement typically comes from “Loan Prospector,” which is Freddie Mac’s loan approval software. Fannie Mae’s version of the software is less likely to give you a one-year requirement. Most lenders can approve loans via Freddie Mac or Fannie Mae.
If you have been self-employed less than two years, ask your lender to try running your scenario through Loan Prospector. There’s a chance this system will require you to document less self-employment than would another system.
If you receive the reduced, one-year requirement, it’s important to understand that your tax return must reflect a full year of self-employment income.
For example, if you became self-employed in April 2017, that year’s tax returns are not going to reflect a full year. If you started your business in November 2016, then your 2017 tax returns will demonstrate a full year of experience running your business.
Give your me a call to find out more – as there are multiple alternatives that we can examine!