Loans By Deb

For Expert Mortgage Loan Services at the Lowest Interest Rates
Call Debbie Stevenson-Mohay at (703) 323-7767

Self-employed borrowers are evaluated the same way salaried borrowers are—by determining if the borrower has sufficient income to support the mortgage payment and a willingness to repay all debt, evidenced by a credit report.  However, the methods used in the analysis of the self-employed borrower’s income are different.

In most cases, a salaried borrower’s gross salary is used for qualification.  This method is not adequate for the self-employed because the daily operation of the business must be supported by gross receipts along with income to the owner.  This requires analyzing the borrower's federal tax returns and other schedules, depending on the type business, to determine net income to the borrower.

The growth, viability, and stability of the business field is also critical in determining the ability of the borrower to meet on-going obligations.  The length of time self-employed and overall experience in the field must be considered.  Because of the subjective nature of underwriting these loans, it is important for the borrower and the loan officer to put together a narrative along with documentation to support the income claim needed for the transaction.

Typically, borrowers who are receiving variable income that they wish to use as “qualifying income” must have their tax returns reviewed.  This includes sole proprietors, borrowers owning 25% or more of a partnership, corporations or “S” corporations, commissioned salespeople (even though they may receive W2’s from their employer), and people who receive annual 1099’s to substantiate their income.

The type of business structure will determine the documents needed.  Documents needed for typical business structures are listed below.

Sole Proprietorship

U.S. Federal 1040 with all applicable schedules attached
Schedule C (Profit & Loss from Business)
Schedule D (Capital Gains & Losses)
Year-to-date Balance Sheet and Profit & Loss Statement

Partnerships (General and Limited)

U.S. Federal 1040 with all applicable schedules attached
Schedule E, Part II (Income or Loss from Partnerships)
Schedule K-1 1065 (Partner's Share of Income, Credits,
Deductions, etc.)
Form 1065 (U.S. Partnership Return of Income) with all
applicable schedules attached
Year-to-date Profit & Loss Statement
Partnership Agreement (may be required)

S Corporation

U.S. Federal 1040 with all applicable schedules attached
Schedule E, Part II (Income or Loss from S Corporations)
Schedule K-1 1120S (Shareholders' Share of Income,
Credits, Deductions, etc.)
Form 1120S (U.S. Income Tax Return for an S Corporation)
with all applicable schedules attached
Year-to-date Profit & Loss Statement

Corporation

U.S. Federal 1040 with all applicable schedules attached
Form 1120 (U.S. Corporate Income Tax Return) with all
applicable schedules attached
Year-to-date Profit & Loss Statement

There are several new loan programs available today.  Lenders are doing their best to qualify people with the lowest rates, lowest down payment, highest qualifying ratios, and the fewest verifications and documents.  Most loan programs have the same requirements for different types of employment.  Programs are available for first-time home buyers, move-up buyers, or investors—regardless of their employment.  However, some loan programs require more strict guidelines for self-employed borrowers.  Consult me for specific details.

This is a common problem among self-employed borrowers.  They are making enough money to pay the new mortgage and they have had steady income for years, but tax write-offs lower their reported income.  Despite their income, they get penalized when they want to buy a house. They don’t qualify!  Lenders look to see if the borrower has enough independent income to pay the mortgage and other debt obligations.  New income from their tax return is not the final determining factor.  The tax returns need to be reviewed and analyzed carefully.  Some tax write offs can be “added” back to the new income.  If the new amount does not qualify the borrower, no income verification loans or "no doc" loans may be very viable options.  Consult me for loan details!.

It’s best to use two years of tax returns. This will stabilize the fluctuations in cash flow that may occur due to the normal ups and downs in many businesses.  If an analysis of tax returns shows that the applicant has a pattern of reasonable increases in income each year, it makes sense to use the most recent year’s tax return alone.  A reasonable increase would be in the range of 10 to 20% per year.  An increase of 40 to 50% in one year over the past year is not a reasonable increase and may well represent some sort of windfall to the business that may not be maintained over the long term.  A 24-month average would then be more logical to stabilize the income.  Remember, common sense prevails in most of these decisions.

Newly self-employed applicants represent a special situation.  The cliché, the first year you take all your clients with you, and the second year you go out of business, rings true with many underwriters.  It is my job to make a very strong case to the contrary.  Verifying previous employment helps to determine a track record of skills, length of employment, and work attitude.  The previous income helps establish the financial history, as well as indicates whether the move to self-employment represents logical progress or a complete departure from an established profession.

Things to Remember

• If you, the self-employed borrower, recently had a bad year but had previous successful years, qualification is still possible.
   

• A bad year may result from several causes—divorce, death, or medical illness.  This could happen to anyone at any time.  If the business had previous successful years, don’t assume that you won't qualify for a mortgage loan!

How to Begin

Don't trust this important transaction to just anyone!  I am a qualified Home Loan Specialist and have expertise in analyzing tax returns to qualify self-employed people.  I can tell you exactly what documents you will need for your particular case.  There is an art to getting these loans approved, so not just any mortgage loan officer will be able to help you get qualified at the best possible interest rate!  GIVE ME A CALL!!

Conclusion

You must be willing to spend some time working with me to qualify for your mortgage loan if your particular situation does not fall within the "standard" guidelines.  I are willing to spend the extra time and effort to correctly qualify self-employed people.  Careful review of tax documents cannot be done accurately over the phone.  There is too much room for error.  Qualifying self-employed borrowers correctly—the first time—will save everyone time, money, and frustration.

I work aggressively to qualify people. A variety of loan programs allows me to fit the cash flow and ownership needs for each borrower.  I specialize in qualifying self-employed borrowers and can provide you the best opportunities for loan approval. 
 

Business Structure Terminology

Sole Proprietor:  A sole proprietorship is a business which is carried out by a single person.  A sole proprietor has the freedom to sell any portion of the business at any time, carries the entire load of the business, and is exposed to unlimited personal liability.

Partnership:  A partnership is an organization of two or more persons who pool their money, abilities, and skill into a business.  Profit or loss is divided among the partners in a predetermined agreement.  There are few formal restrictions on the management of the business and each partner in a partnership is exposed to unlimited liability.

Limited Partnership:  A limited partnership is an entity in which one or more persons with unlimited liability (general partners) manage the partnership and one or more other persons contribute capital (limited partners).  The limited partners have no right to participate in the management and operation of the business.

Corporation:  A corporation is a legal entity chartered by a state government.  It is separate and distinct from the persons who own it.  It can sue, be sued; hold, convey, and receive property; and enter into contracts under its own name.

S Corporation:  A Subchapter S Corporation has a limited number of stockholders and elects not to be taxed as a regular corporation.  Shareholders include in their personal tax returns their pro rata share of capital gains, ordinary income, and so on.  S Corporations avoid double taxation, which allows the expense to be deducted by the S Corporation without the officers having to pick up money for these expenses in taxable compensation.