There are almost nine million self-employed people in the United States. The state of California alone is home to almost two-millions of these self-employed entrepreneurs. The advantages of self-employment are many, a flexible schedule, control of your life and the ability to select who you work with and what you do. The financial benefits of self-employment can be tremendous, opening up any number of tax deductions related to the business.
It is these deductions that minimize the Federal income tax liability of the self-employed that transforms into the primary disadvantage of self-employment, the qualification of a home loan. Most mortgage lenders do not have access to the programs that can provide lending solutions for the self-employed. Many loan officers actually go so far to advise the self-employed borrower to increase his or her taxable obligation to document enough income to qualify for a traditional income analysis home loan. When a self-employed individual, minimizes their business deductions to qualify for a home loan, the business suffers. Rather than then spending the money on business development or expansion, the money will be going to the Federal government via income tax obligation.
Fortunately, there is another option, a solution that will allow the self-employed tax payer to continue to minimize their taxable obligation and qualify for a home loan.
The Bank Statement program has very much emerged as the premier mortgage solution for the self- employed borrower who has experienced challenges in securing traditional mortgage loan.
The Self-Employment Advantages
Instead of the documentation and analysis of tax returns, payroll checks, or W2’s, the presentation of income is determined by an analysis of a twelve-month average of personal and or business bank statements. As long as the self-employed borrower is regularly depositing income into a financial institution, that income can be used to qualify for a home loan. Income is determined on the average of deposits over a 12-month period of time so the program is perfect for someone earning seasonal income, consultants, real estate agents, attorneys, counselors, day-traders, artists, property investors, developers, or any other professional with a non-traditional income stream. The advantage of the bank statement program is that income will not be based on tax returns and the self-employed borrower’s income to qualify will not be reduced by tax deductions.
The program will require the verification of self-employment of a minimum of two years. This documentation can come from the submission of a business or professional license or a letter from a CPA confirming a minimum of two-years self-employment. The Bank Statement program will not provide a mortgage solution for the self-employed individual who collects cash and then pays his or her expenses primary in cash. The program requires the consistent deposit of money in an account. The program will require the reasonable verification of the deposits related to a business deposit. Large or irregular deposits will be identified and required to document. A few things to keep in mind in the process, bank statements that reflect NSF, overdraft protection transfers or negative balances will create a challenge for the bank statement loan program. An account that reflects the name of other individuals that are not on the loan application can also present a challenge for the bank statement program.
Mortgage Programs for The Self-Employed
The Bank Statement program has any number of mortgage applications including the purchase, refinance, and even the extraction of cash from an owner-occupied, second home, and even investment property. There are even some mortgage banks that offer interest-only bank statement programs for the self-employed.
The traditional income analysis of a self-employed borrower the bank statement program can be extremely complicated depending on the complexity of the tax returns. A self-employed borrower could have any number of businesses, different income streams, multiple properties, loss carry-over, capital expenses, one-time expenses and even note income. For many loan officers, these scenarios can represent some challenges of qualification and they will simply submit the loan to underwriting without a solid understanding of how the income will be determined. Then two to three weeks later, an underwriter will review the income and come back with a barrage of questions or worse, deny the file based on a lack of documentable income. The process can be extremely frustrating especially for a self-employed customer who is current on their loan and has been turned down for a mortgage loan with a lower monthly payment or has a long term banking relationship with the company that has just denied the loan.
In contrast to a traditional income analysis, the bank statement program for the self-employed borrower can be much easier loan process for the borrower. The primary challenge in documentation is the annoyance of providing twelve months of all pages of bank statements, fortunately most banks offer the ability to access the statements on-line in an electronic format. Many bank statement programs do not require the submission, review or verification of tax returns in the loan process. This eliminates much of the concern related to the interpretation of income that can cause delays and frustration of self-employed borrowers with complex tax-returns. A twelve-month average of gross deposits is calculated as a representation of monthly income to qualify. That gross monthly income must support the proposed expense of the monthly payment of the mortgage loan payment, property taxes, home owner’s insurance and any other minimum monthly payment of revolving or installment debt within a credit report.
Most bank statement programs so not like to exceed a debt to income ratio of 45%, but unlike traditional mortgage loans for the self-employed, there is not the frustration and lack of transparency of how an underwriter will calculate income with the bank statement program.
The bank-statement program offers mortgage financing programs for the self-employed who otherwise are left to the interpretation of income that does not necessarily reflect the true income of the borrower. The most important thing that a self-employed person who is in the market to purchase or refinance a home can do is to research the options that are available, it is a myth that they will have to “pay cash,” or remove their deductions and pay Federal income taxes to secure a home loan.
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I really enjoyed working with Chad Baker and the rest of the team. This was our first time buying a home in California and we started with unnecessary assumptions based on our previous experience as home-owners in a different state. Chad and his team were available throughout the whole process, explaining the state differences, answering all our phone calls and emails quickly and directly, and providing detailed weekly status reports so that all parties including agents knew exactly where we were in the process. Chad was very experienced and provided customized loan products for us to consider, which definitely facilitated our transaction. I recommend the Chad Baker team! ”
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