It’s not that they don’t have adequate income/assets to take on a mortgage. It’s just that self-employed borrowers can’t show in pay stubs, Form W2s, and sometimes tax returns their ability to repay their loans. There are a number of mortgages that are made for or admit the self-employed professionals of today. Here’s a non-definitive list of loans starting from those requiring no income verification.
Option 1: No Income Verification Loans
Also known as no doc and stated income loans, these mortgages are underwritten based on your credit score, employment history, and down payment. Credit scores required can be in the 700 range and equity at 40%.
Lenders will verify your self-employment and in lieu of W2s and pay stubs, your personal and business bank statements good for a year. These bank statements should match your income statements.
With the financial regulatory reform of recent years, stated income loans are not the liar loans of the past. Their documentation may not be full but lenders compensate it with other factors as mentioned above.
Option 2: Bank Statement Loans
These loans are akin to stated income loans, requiring a 12-month history of individual and/or business bank statements. LTV can be between 75% and 80% as it varies per lender.
Typical requirements are business license and related permits, tax returns and tax return transcripts. There may be other requirements that depend on, among other things, the length of your self-employment history, e.g. two years or less.
Option 3: Conventional Loans
While loans sold to GSEs Fannie Mae and Freddie Mac require full documentation (they still do), they have loosened up their guidelines for the self-employed.
For Fannie Mae’s part, a self-employed borrower’s income can be verified using his/her individual or business tax returns or both for the past two years, as applicable. The self-employed borrower, which is defined by Fannie as “ any individual who has a 25% or greater ownership interest in a business,” will need to show two years’ worth of prior income as proof that this source of earnings will likely continue. Those who have been self-employed recently may provide their latest federal tax returns.
Back in September, Freddie Mac introduced a pilot program for first-time homebuyers with low income and alternate income sources like self-employed professionals.
Option 4: FHA Loans
Two years seems to be the “magic” number for mortgages for the self-employed as FHA loans also require that you should have a steady flow of self-employment income for the last two years. This will be shown by duly signed and dated tax returns and schedules for the past two years. Income statements and balance sheets are also required.
Take note that the FHA requires full documentation but the perks can be worth it. For one, your down payment could be as low as 3.5% depending on your credit score.
These are just some options that you can look into when shopping for mortgages. Lenders may offer you other options, talk to one today!»