Almost 10 million workers are self-employed in one form or another in the United States. This is great news for those that were unable to secure a job after the downfall of the economy. It is also good news for the economy as more money is passing through it to keep things on the up and up. The downside of self-employed workers, however, is the inability to secure a mortgage. Fannie Mae and Freddie Mac have strict guidelines in regards to self-employed borrowers. Not only do they have to provide at least 2 years’ worth of tax returns in order to use the income for qualification purposes, the income they claim on their tax returns is the only income allowed. If you are like most business owners and you take advantage of every tax advantage and write-off available (who wouldn’t?) then getting a mortgage just got even harder, unless you are looking at non-QM mortgages.
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Less than 2 Years in Self-Employment
It makes sense why Fannie and Freddie require business owners to be in business for two years. It shows consistency as well as the ability to keep your business afloat. But, if you were among the unlucky that lost your home during the housing crisis and are trying to pick up the pieces, not to mention the fact that you are finally making a good living, you want to get into a new home. This is possible with non-QM mortgages.
Just what are non-QM loans? They are loans that are not protected by the government. What this means is that borrowers have the ability to go after the lender in a lawsuit if they were to suddenly become unable to afford the loan. The only way the lender would suffer the consequences is if it could be proven that the lender did not do due diligence in determining if the borrower was able to afford the loan. Most, if not all, lenders do not just hand out loans any longer. They do not take your word for it regarding income, assets, or employment. Everything gets verified. Where they differ from any other loan, however, is that they keep most of the loans on their own books or they sell them to private investors. These individual banks or investors are willing to take the risk on those self-employed for less than 2 years. Of course, they are looking for compensating factors, such as:
- Someone in the industry for many years before they opened their business
- An expert working at the company that can help them stay afloat
- A professional CPA handling the books
Something that can show that your business is legitimate and that you are in it for the long haul can help you get into a mortgage while self-employed.
Using Self-Employment Income
One of the largest downfalls of self-employment is the amount of expenses you write off. These write-offs come directly off of the amount of income you claim. In the end, this makes your debt ratio higher and your ability to get a loan much lower. If the income is lowered too much and you do not qualify for a loan, you can turn to non-QM loans. Depending on the lender, you may be able to add certain expenses back into your income, lowering your debt ratio and increasing your chances of obtaining a mortgage. Because there are no regulations on the non-QM mortgages, with the exception of ensuring that you can afford the loan, every lender has different guidelines. You will have to shop around with various lenders until you find one that will take your exact situation.
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Work on your Compensating Factors
While you are trying to determine if you will qualify for a loan, whether qualified or non-qualified, you should be working on your compensating factors. These are things that do not pertain to your income, but make your loan profile less risky. They are things like:
- The amount of liquid assets you have on hand to help you in the event that your income does not provide enough for your mortgage payment
- A high credit score. It is not always easy to improve your credit score, but if you know you want to shop for a home, start making sure your outstanding balances are low compared to your available credit; make your payments on time; and take care of any collections or judgements
Anything that makes your loan file look less risky is what lenders are after when trying to qualify you for a loan. Granted, there are hundreds of different programs out there that will eventually meet your needs, but if you are looking for low rates and decent terms, you will want to make your loan application as attractive as possible.
In the end, non-QM mortgages make it possible for the self-employed to be homeowners much sooner than any other loan type. If you do not want to wait until you own your business for at least 2 years and have 2 years’ of tax returns to show for it or if you know your tax returns will not show enough income, then the non-qualified loans are the best option. If you shop around within a short amount of time, you will not negatively affect your credit score, yet will have many options to choose from, allowing to you take the one with the most attractive terms.
You do not have to worry about any loan taking advantage of you, as subprime loans are a thing of the past. Non-QM loans are not subprime; they are alternative lending for borrowers that do not qualify for traditional loans. The underwriting guidelines will differ, but the need to verify every aspect of your loan will not. You will not find stated income, stated asset, or no documentation loans – you should be prepared to provide documents to cover every base to ensure the lender that you can in fact, afford the loan that you are trying to obtain.