Home Loans For Self-Employed Borrowers

Last Updated 1/12/2015

What purchase mortgage home loans for self employed are available for buyers today?

Despite often being more affluent and financially capable than their W2 salaried counterparts, self-employed borrowers certainly found it tougher to secure purchase mortgage financing and refinance loans in the wake of the financial crisis. So what options are available to independent contractors, small business owners, and non-salaried CEOs today? How does the home loan qualification process differ for these individuals?

Home Loans for Self Employed

In spite of their often superior earning potential, self-employed borrowers can often find it more challenging to qualify for purchase mortgage loans due to their type of income, as well as their money management choices. Self-employed borrowers can often be highly leveraged due to their entrepreneurial and highly optimistic personalities. Conventional underwriting hasn’t really caught up, or at least is very conservative when it comes to qualifying their income too.

A salaried underwriter or automated underwriting system doesn’t always understand the mindset and financial management of these home buyers. They often consider it riskier, even though borrowers would certainly disagree. So look for mortgage lenders than love, and even prefer lending to self-employed (SE) borrowers. Also look for purchase mortgage programs that match your goals, lifestyle, and income. For example; you may have high expectations of rising income and wealth, and yet experience uneven income throughout the year. You may barely see a dime coming in one month, but then are flooded with six or seven figures in earnings the next. With this in mind longer term amortizations, interest only options, and ARMs (adjustable rate mortgages) might provide increased flexibility.

When it comes to qualifying for a home loan there can be several challenges. For new business owners and freelancers this can be having an established history of consistent income as a self-employed borrower. You may need to show you have been working like this for at least two years, or at least be able to show a long history in the same line of work.

Investment income may also be discounted down to a modest income credit calculated as a percentage of your portfolio value. This can be far less than your actual returns.

Qualifying earned income for self-employed borrowers is also generally based upon net adjusted income on tax returns, not the far higher gross income or 1099 figures. This is normally averaged over the last couple of years, or the lowest number is used if income has been declining. This can be just a small fraction of actual income. Using these calculations a small business owner with gross receipts in the millions of dollars range, might only end up being credited with five or barely six figures in income, or may even show a net loss on tax returns.

Fortunately, there are alternative purchase mortgage loan programs which may accept bank statements (deposits) in lieu of tax returns to show income. This can provide clear advantages, and may be more representative of actual income.

Ultimately, self-employed individuals should be more bullish about purchasing homes and obtaining financing than they have been, but they also need to be prepared for some of the challenges and know what to look for in the best fitting mortgage programs that offer home loans for self employed borrowers.