Many 1099 or schedule C self employed borrowers are confused when it comes time to try to get a home loan. It’s true that W-2 employees are much easier to qualify for in terms of paperwork. Many loan officers deny working with self employed borrowers specifically for this reason. However, I am self employed as well and fully understand the tax laws surrounding this and how self employed borrowers can get a home loan. The main problem with many self employed borrowers and getting a mortgage loan is that they have a lot of deductions throughout the year. These deductions are crucial to their business success so that they don’t have to pay taxes for income that was used to invest back into their business. But this creates a problem, many self employed borrowers have little to no net income at the end of the year. To qualify for a QM (qualified mortgage) loan, we need to view your last 2 years of tax returns and average the monthly net income to find out your maximum mortgage payment that you can qualify for.
The problem here is that many self employed borrowers do have positive cash flow, but they choose to reinvest it back into the business. They have the ability to save the money, but they have chosen to spend it as a tax deductible expense that benefits the long term success of the business. But once they choose to buy a home, they can usually afford the monthly payment for the home they want. So this means that looking back, there is not a sufficient history during the last 2 years of positive net income. Sometimes even negative net income over the last 2 years. So what can be done? A non QM, non qualified mortgage, is the best option for these borrowers. Non QM just means that the mortgage does not qualify for Fannie Mae/Freddie Mac requirements. Meaning that non every accredited lender does these types of loans. Here’s how it works:
Bank Statement mortgage loans are what self employed borrowers need.
So instead of using a 1099/1040/W-2 for a mortgage loan. The borrower submits the last 2 years of bank statements to the loan officer. Then to get qualified, the bank statements are analyzed by the loan underwriters to get the borrower approved for a mortgage loan. The biggest difference to the borrower here is that the loans are more risky to lenders, so it means that if you do get approved, your interest rate will be slightly higher than if you were approved with a normal, or QM loan.
If you are a self employed borrower, connect with me on the contact form or let’s set up an appointment to talk about your home buying goals!
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