Today’s economy requires many people to turn to self-employment to make a living. The unfortunate part of this, however, is that it becomes harder to obtain a mortgage when your income fluctuates so much. Self-employed borrowers typically have fluctuating income that makes it hard to pinpoint just how much they make. In addition, many self-employed borrowers write off a large number of expenses on their income taxes, making it look like they do not make nearly as much money as they really make. Because mortgage lenders are required to use the amount of money you make as reported on your tax returns, it becomes very difficult to qualify for a mortgage.
Applying for a Conventional Loan
If you have good credit and think your debt ratio is close enough to qualify for a conventional loan, you can apply for this type of loan. In order to qualify, however, you will have to provide full documentation which includes:
- Last two years’ tax returns with all schedules
- Business license
- Bank statements
- Current Profit & Loss statement
If the tax returns do not report income high enough to get your debt ratio down, you can do one of two things: apply for a different type of loan or wait a year or two and file your taxes with fewer write-offs in the future. Typically, potential borrowers choose to apply for a different type of loan.
A Great Alternative
Since most self-employed borrowers will not qualify for a conventional loan, there is a great alternative that makes it easy to qualify for a loan. This alternative is the Bank Statement Loan. This loan is as close to a subprime loan as a borrower can get today. As the name suggests, the lender uses your bank statements to verify your income rather than any paystubs or tax returns. The benefit to this method is that the lender can see the gross amount of money you put into your bank account every week or month, depending on how you get paid. In this case, your expenses are not taken into consideration as of yet – your total gross income is able to be used.
How the Income Gets Verified
Because bank statements have the potential of being forged, there are certain precautions lenders need to take with this type of loan. When you use tax returns to qualify for a loan, the lender can verify the amounts you provide them with the IRS through an activated IRS Form 4506 which allows the lender access to your tax transcripts directly from the IRS. Because bank statements do not have that type of verification, the lender must verify other things, such as:
- Your self-employment and income from your CPA – The CPA can provide a letter of verification on his letterhead to verify your employment and income status
- The presence of a business license to show that your business is legitimate
- A bank’s stamp and date to verify that the account statements are real
Using the Right Account
You have to choose the right account to use to verify your income when you use a bank statement loan. You are unable to use both a business and personal account – you have to choose one or the other. If you do need to use both in order to qualify for the loan, it will be necessary to determine the difference between the two as the lender needs to make sure you are not “double dipping” or using business income in your business account and then again in your personal account.