Many of us have had a desire, a goal or just a dream to be self-employed. We look with envy at those who are. We imagine that they have a large degree of freedom. We wish we could take time off, extend our lunch hour or just not go to work when we don't feel like working. All the above may be true to some degree. However, ask the self-employed person to speak to the reality of the situation and you may find some very interesting answers to the questions of work hours, anxiety, taxes and juggling both business and personal requirements.
It is not as easy as one may think. However, there are advantages to being self-employed. My purpose today is not to enumerate the advantages nor the disadvantages of the self-employed state. It is, however, to answer some questions self-employed people have asked when they call to inquire about obtaining a home loan.
FannieMae and Freddie Mac have developed a straightforward and traditional way of underwriting the self-employed borrower. These two quasi-governmental agencies are the largest purchasers of home loans from lenders. After they purchase the loans, the loan are then securitized and sold on Wall Street to receive cash that is returned to the marketplace to facilitate the making of additional loans. FannieMae considers anyone who has an interest of 25% or more in a business as self-employed. Commissioned salespeople are considered self-employed if their income is reported on IRS Form 1099.
If you are a sole proprietor, have ownership in a corporation (C or S), or are a partner in a general or limited partnership or participate in a limited liability company you may be considered self-employed. If you fit into one of the above categories, the main item reviewed when you apply for a loan is, you guessed it: your tax returns.
When you run a business you know that there are expenses to write off. Any expenses you have and deduct on your tax returns will reduce your gross income. The income that determines your viability as a self-employed borrower is your net income. Not only is the most recent tax return evaluated, but also the tax return for the prior year. We take an average of these two years with more weight on the year just ended.
If there is a substantial reduction of income on the most recent year's tax return, the income figure on that year's tax return will be used and it will not be averaged with the prior year. If we are into the new year by 90 days or more, the borrower must supply a year to date profit and loss statement. Many self-employed people earn a good income but it is not reflected on their tax return. Can they qualify for a loan? The answer is an unequivocal, "yes!"
A category of lender has entered the marketplace over the past several years called "non-conforming." These lenders don't sell their loans to FannieMae and Freddie Mac and have developed their own underwriting guidelines. If you have good credit, you can qualify for loans without having to show tax returns. You can even go up to 90% of the value of the home with proof of income solely being your bank statements.
If you have a downpayment of 20% or more you may not have to show any income per se on the loan application. Thus on this type of loan application, you leave the income column totally blank with your good credit and assets being the determining factors for qualification. Even if your credit is somewhat impaired, these non-conforming lenders will accept bank statements for verification of income.
So, if you are self-employed and think that buying a home is out of the question, know that it has never been easier than it is today. Even if you have had credit problems in the past and currently have a high interest rate loan, you may be able to refinance out of your current loan into a new loan with a lower interest rate even though self-employed. There are numerous programs available today that were not available to the self-employed borrower just two or three years ago. You may be surprised that getting a loan is not as difficult as you think even if you are on your own.
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