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SELF-EMPLOYED BUYERS: The Best Way to Get a Mortgage!
Self-employed borrowers present one
of the most challenging areas of mortgage underwriting. Qualifying self-employed people often
requires time, energy, and patience. A
fair and honest qualification requires a special set of skills.
Most mortgage companies underwrite
their loans based on guidelines established by the Federal National Mortgage
Association (Fannie Mae), the Federal Housing Administration (FHA), or the
Veterans Administration (VA). These organizations
share similar underwriting guidelines for self-employed borrowers. Additionally, some lending institutions have
non-standard sources to draw upon for the purpose of making loans available to
those who do not fit into specific guidelines.
Generally, there is a standard set of
guidelines that pertain to employment and income. They include:
or more years of self-employment.
25 percent or more in a business.
two-year minimum average income.
This is done to even
out fluctuations common to self-employed
positive overall economic outlook in the area for the
significant decline in income over the period analyzed.
Self-employed borrowers are generally
evaluated along similar guidelines that salaried borrowers are by determining
if the borrower has sufficient income to support the mortgage payment and a
willingness to repay all debt provided on a credit report. However, the methods used in the analysis of
the self-employed borrower’s income are different.
Most of the time a salaried
borrower’s gross salary is used for qualification. This method is not adequate for the
self-employed because the daily operation of the business must be supported by
gross receipts along with income to the owner.
This requires analyzing the borrower’s federal income tax returns and
other schedules, depending on the type of business, to determine net income.
The growth, viability, and stability
of the business field is also taken into account in determining the ability of
the borrower to meet ongoing obligations.
The length of self-employment time and overall experience in the field
must also be considered. Because of the
subjective nature of underwriting these loans, it is important for the borrower
and the lender to put together a narrative along with documentation to support
the income claim needed for the transaction.
There are several new loan programs
available today for the self-employed.
Lenders do their best to qualify people with the lowest rates and lowest
down payments. They also attempt to
complete the transaction with the fewest verification documents. Most loan programs have the same requirements
for different types of self-employment.
Programs are available for first-time buyers, move-up buyers, or
investors regardless of their employment.
However, some loan programs will be more strict for self-employed
If a borrower can’t qualify because
tax write-offs decrease his new income too much, a problem common among
self-employed borrowers, lenders will then look to see if the borrower has
enough independent income to pay the mortgage and other debt obligations. They will carefully inspect tax returns and
check to see any possible way to get a self-employed businessman into a new home. Generally, two years of tax return history
will be analyzed to account for fluctuations and track income patterns. Simple common sense is often a prevailing
factor when reviewing these documents.
As for newly self-employed
applicants, they represent a special situation.
Verifying previous employment history to determine a track record of
skills, length of employment and work environment can be taken into
account. Previous income helps establish
the financial history, as well as indicates whether the move to self-employment
represents a logical process or a complete departure from an established
There are some things to keep in
mind. If the borrower recently had a bad
year but had previous successful years, qualification is still possible. One bad year may be the result of a divorce,
death, or medical illness. Provided the
business had been previously successful, don’t assume that you can’t be
As a self-employed borrower, you must
be willing to spend the time to work with an agent and a mortgage consultant
specific to your situation. Careful
scrutiny of tax returns will be necessary and meetings will be done
person-to-person - not over the phone.
The process may be a little more involved than a typical home loan, but
the extra work will ultimately result in the most important part of the
purchase - getting you into a new home.
Choose your agent wisely.Working with a full-time
professional real estate agent is a must. Ask questions of your agent.
Find out how knowledgeable he or she is about houses currently for sale
in your price range and also of houses that have recently sold. Can your agent recommend a good lender that
has the reputation of excellent customer service and low rates? Does your agent ask questions of you to have
a full understanding of what you are looking for to help you get the most home
for the money?
Thank you for requesting a copy of
this “FREE REPORT”
For prompt, courteous, professional
service, call Jan Wilson:
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count on or just want to discuss this further?
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don’t hesitate to call me. I look forward to the opportunity to serve you.™