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Self-Employed Borrowers and Qualifying Income

Orange County, CA – The 2011 tax deadline recently passed. Another tax year is in the books. Tax returns can be complicated for self-employed borrowers and business owners. But they play an important part in determining your income for a mortgage. If you’re buying or refinancing a home, underwriters will now be using 2011 tax returns. You may have filed a return or filed an extension. In either case, you’ll need to show proof to get a home loan. 

Income and taxes are generally easier for W2 employees. They tend to have less fluctuation in income. Paystubs, W2’s and employment verifications make calculating and reporting the income much easier.

Income can be a different conversation with self-employed borrowers, like business owners. Income can fluctuate widely. Why? One of the main benefits of being a business owner are the tax writeoffs. These writeoffs reduce the taxable income. The business owner is able to keep more of what they earn. However, this is a double edged sword because it reduces their net income. For mortgage purposes, we qualify self-employed borrowers on net income. This can have a big impact on their debt-to-income ratios.

Most lenders take the most conservative approach when calculating income. By taking this approach, it reduces the lender’s risk. So underwriters typically require tax returns covering the most recent 2 years. Let’s assume the business owner claimed $60,000 of income in 2010 and $80,000 in income in 2011. Most lenders require their underwriters to average those returns and give the borrower an income of $70,000. This reduction in income could be a deal killer for a self-employed borrower.

With PrimeLending we base our income calculation on the results we receive from the automated underwriting system. In most cases the automated underwriting system will be Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector. These systems allow lenders to upload your file for approval. Then they tell us if the loan meets Fannie Mae or Freddie Mac’s loan criteria. If approved, the automated decision will tell us the conditions they’ll require. We’ll know specifically if we need 1 or 2 years of tax returns. If only 1 year is required we would qualify the self-employed borrower with the current tax return. Therefore, in the example above, they would get credit for $80,000 in income instead of $70,000.

I’ve seen many cases where this was the difference maker.

Does this scenario sound familiar? Am I talking to you? Have you had a problem getting the income you need to qualify for a home loan becasue you are self-employed? What if your 2011 income was worse than 2010? There’s still hope…if you filed an extension.  Let us review your information and see if we can get you qualified with 2010 only.

Scott Storace

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