The 14 million or so self-employed borrowers in the U.S. naturally mourned when the housing crisis hit and banks tightened up their lending guidelines. Gone were the days of no-doc and stated income loans.
Following that, self-employed borrowers were required to complete a staggering amount of paperwork – enough to almost prove that they didn’t even need the loan. Like all borrowers, they had to submit information regarding income, debts, savings, employment history, and a record of where they’ve lived.
Of course the lender checked their credit and verified the information provided. All borrowers were (and are) also required to show the source of any large or atypical deposits to their bank accounts.
For self-employed borrowers, even more was required. For instance, in addition to bank records, they were required to submit copies of two years of complete federal income tax returns, plus documentation verifying the vitality of their business activities.
These stringent policies have now been eased.
First, self-employed borrowers who don’t regularly pay themselves wages from their business must now show only that they have access to income from the business. If not a sole proprietorship, this can be accomplished with a letter of incorporation or a K-1 filing showing the borrower’s ownership percentage.
Of course, they do need to show that the business income can support withdrawals.
The other two changes have to do with submitting federal income tax returns.
The old requirement for two years of tax returns has now dropped to one year. The borrower must show self-employment income from the business over the entire twelve months, and a cash-flow analysis must verify that the business is sound. The benefit – if things didn’t go so well the previous year, or if you were just getting started, you no long need to disclose the fact.
Next, borrowers who qualify for a mortgage loan without counting income from their self-employment are no longer required to submit their business tax returns as long as they have business w2 income and they qualify with that income only. This is a big plus for those whose self-employment is not yet contributing to their income – or for whom self-employment provides substantial “paper losses” to offset income tax on their wages or salaries.
If you’re self-employed and wish to purchase a new home or refinance an existing home, get in touch! The Mike Clover Group at Homewood Mortgage would love to help.
You can give us a call at 469.621.8484 or apply on line at mikeclover.com.
18170 Dallas Parkway
Dallas, TX 75287