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Self Employed Mortgage: How To Get Approved



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if you're self-employed and looking to

get a mortgage you might be a little

fearful because you hear all these

horror stories of people not being able

to get approved for a mortgage because

they're self-employed

well I'm gonna walk you through two

different ways two different types of

loans you can use to get approved for a

mortgage if you're self-employed it's

really not that difficult my name is

Kyle with Wynn the house you love calm

let's go ahead and jump into this so how

do we get approved if you are

self-employed all right so you maybe you

own a company whether that looks like an

LLC or Corp and you are trying to get a

mortgage here so why in the world is

this income even different from a

regular employee so the main reason why

your income as a self-employed buyer is

different than somebody who's like a w-2

employee is because a lender actually

takes on more risk they bu self-employed

buyers as riskier than regular employed

buyers and that's because lenders want

stable consistent income all right so

when somebody works for a company

normally that income is viewed more

consistent than somebody who's

self-employed because they have a

company that usually is providing a

paycheck and there's the assumption that

that company is doing well all right

that's just an assumption that lenders

sake but when you're self-employed

lenders don't usually take that

assumption their assumption is you own

that business or the majority of that

business and they need to make sure that

not only are you underwritten but the

business is also able to provide cash

for you in the future

to pay that mortgage down so they use

what's called the ability-to-repay role

that basically says lenders have to look

and see can you actually afford this

mortgage can you pay it back based on

everything that they're looking at and

they can only consider taxable income so

this is where your self-employed buyers

get into a little bit of trouble is

because maybe this year you made

$100,000 personally but you wrote off I

see some people write off maybe $60,000

worth of that so to the lender you only

made $40,000 they can't take a hundred

thousand

as your income because you said that

that you had $60,000 worth of expenses

so that's why we're this it could be a

little tricky is because you have a lot

of deductions and income might be

fluctuating depending on seasonality or

depending on the different years and

most likely if you're self-employed you

know your income is probably trending in

a specific direction hopefully it's

going up each year but it's possible

that it's going down as well just due to

the nature of self-employment so

something that you'll want to know is

that self-employed buyers need to have a

minimum two years of being self-employed

so if you were at a w-2 job last year

and you just flipped to a a new

self-employment work this year you're

not gonna be able to get a loan you need

to be self-employed for two years no

matter what your income looks like in

that range you need to be working

self-employed for two years to be able

to qualify for a mortgage and the reason

why is because lenders want to see that

you have a longer history of employment

that you're you're working consistently

and they also want to see income that's

consistent so there's gonna be two

different types of loans that you're

gonna run into you're gonna run into a

traditional loan and a portfolio loan so

you can call these like a niche product

or you know they we can use

interchangeable language in here but

these traditional loans are just your

regular loans things like conventional

loans FHA VA USDA kind of the big four

main loans that you see these are the

loans that regular people get those

types of loans these niche portfolio

loans are things that allow you to not

have to show your tax returns and they

use alternative documentation to prove

your income so let's talk through what

that looks like here in just a second so

okay let's first talk about traditional

loans again traditional loans

are our things like conventional USDA

FHA and VA loans so when we're

qualifying with one of these loans our

write-offs are gonna have a huge impact

again so if we if we made $100,000 this

year but we wrote off $60,000 worth of

expenses our net is only going to show

$40,000 so now I can only qualify with a

loan using a $40,000 income that

dramatically changes how much I can

qualify for so if you have write-offs

those are gonna be impacted pretty

greatly on your mortgage the lender only

wants to look at your net income and not

the gross income and there's no way to

get around this using a traditional type

of loan like conventional FHA usda or VA

they have to look at net there's no

option around that for these types of

loans also they're gonna require one to

two years of personal and possibly

business tax returns all right I know it

can be scary to have a lender look at

these especially if you're thinking

there's I might not have enough income

on there but when you work with a lender

it should be a collaborative experience

not something that you're afraid of so

what I would suggest is have these

documents ready upfront show them to the

lender and say hey I don't know where

I'm at but I need some help exploring

what can I call if I for wood my tax

returns show as far as the income that I

could use on my loan so get those

documents up front

most the time you'll just need the

personal sometimes you'll need the

business tax returns as well it kind of

depends on the loan program and how

you're setting up your loan there but

your loan officer should be able to walk

you through what that looks like

also you might be asked for profit and

loss forms so this might be included

when they ask for your business tax

returns so they want to see the

viability of your business especially if

it's a sole proprietorship or you have a

majority stake in the company they're

probably going to want to look at profit

and loss to see the trend and cash flow

of your business year over year

all right also when you get these loans

they're gonna be just the regular

interest rate that anybody else would

get

so a lot of times I hear self-employed

buyers feeling like they're gonna get

charged a higher interest rate because

they're self-employed which isn't true

if you are able to qualify for a loan

with your write-offs or maybe you don't

have a lot of write-offs if you can

qualify for one of these loans as a

self-employed buyer then absolutely

you'll get the same interest rate that

every other employee let you know w-2

employee would get on a conventional FHA

USDA or VA loan so let's say that you're

right offs are too high and you don't

have enough net income to show for how

much income you actually make right so

maybe in this example you do make

$100,000 a year but you wrote off

$60,000 so you need to be able to

qualify it with a hundred thousand so

the way that you do that is through a

portfolio loan traditional loans are

going to be mainly for if you can

qualify on your net portfolio loans are

going to be if you need to qualify on

your gross okay so there are two main

types of portfolio loans one is a bank

statement program sometimes people call

this stated income stated income used to

be a thing before the housing crash

happened and doesn't exist anymore

because we had the housing crash and

they were like really bad loans I stated

income loans would be where someone

would walk in and say hey I make hundred

thousand dollars a year and then make it

would say that sounds great here's a

loan and doesn't work like that anymore

some people are renaming bank statement

programs as stated income which isn't

true because bank statement programs to

look at income so a bank statement

program is where instead of showing your

tax returns a lender asks for your past

12 to 24 months bank statements and then

what they do is they average the

deposits over the past 12 to 24 months

and give you an income so that's how

they decided the income you might be

able to use personal bank statements or

you could use business bank statements

normally with business bank statements

they use a factor of 50% expense ratio

so if in your business expenses or if

you're in your business bank account

let's say over the past 12 months you

earn $200,000 the lender would cut that

in half and say you earned a hundred

thousand

if it was your personal bank statement

and you had $100,000 deposits they would

use $100,000 as your income so it can be

a little tricky again talk with a lender

they'll help you do all the math here so

you have bank statement programs you

also have 1099 programs these are a

little bit newer a 1099 program is where

a lender would just look at your past

year or past two years 1099 and then

they normally use an expense factor on

that as well so normally what I have

seen is an expense factor of 10% so what

they would do is take your 1099 from

last year let's say last year you made

$100,000 on a 1099 they would take 90

percent of that as your qualifying

income so they would say you made

$90,000 in qualifying mortgage income

all right

portfolio programs have a little bit of

a downside though normally they need

about 15% down or higher these

traditional products I mean shoot USDA

is 0% down ba is 0% down FHA s 3.5% down

and conventionals 3% down so 15% down is

can be a little bit tight

you also need good credit normally

you're gonna want to be in like the mid

to higher 600 score range somewhere

around a 660 to a 680 and higher again

most of the time it's gonna be 12 to 24

months bank statements averaged and

something that you're gonna run into no

matter what portfolio program you use is

it's gonna have a higher interest rate

so and the it can be pretty high

honestly so if a traditional loan you

know let's say a traditional

conventional loan I'm just going to say

if the interest rate right now was 3.5%

with a portfolio loan you're probably

looking closer to a 5 to 7 percent

interest rate they're just gonna be a

lot higher because they are riskier

because they're keeping those loans in a

house they're usually not going to be

able to sell them on a secondary market

to Fannie Mae or Freddie Mac like you

can with a traditional loan and there

they work well if you need them I would

always try to go with qualifying for a

traditional loan if possible because the

portfolio loans just are

a bit more expensive so some things to

consider number one is you don't want to

be tax blind when when you're going into

this process so a lot of people who are

self-employed I get it you're you're

already working a ton you're managing a

business you're doing the things in your

business you're managing employees and

orders and everything that needs to go

on with you setting up your business the

last thing you want to do is worry about

taxes so most of the time business

owners have their taxes prepared by

somebody else and the accountant

normally is trying to help you they're

trying to say hey I want to get all

these deductions for you so you save

money in taxes and you think great but

the flip side of that is when you write

off all this stuff in your taxes you

might not be able to qualify for a

mortgage so don't be blind when you're

having your taxes done something you can

do is talk with a lender and say hey I

want you to take a look at my taxes see

what they look like right now get that

advice before you then file your taxes

for the upcoming year that way you can

see is there anything that I need to

change maybe do I need to hold back on

some of the deductions that I'm putting

in my tax return so that I can qualify

for a mortgage so something to be

mindful of a lender can help you take a

look at what you can qualify for with an

accountant their job is to help you save

the most money on taxes a lenders job is

to help you qualify for a mortgage and

they're kind of working against each

other at that point so talk with both

and see if you can come up with a remedy

that's going to help you qualify for a

mortgage if that's what you're looking

for in the near future another

consideration is if you don't if you

can't qualify for a traditional loan and

you really don't want to go with a

portfolio loan one option is to add a

non occupant Co borrower or cosigner

it's the same thing basically what

happens is you'd be the primary borrower

on the loan and you would have somebody

co-sign for you who won't live in the

property so this is a great option I've

done this with several people who have

been self-employed we had trouble

documenting income and they didn't have

a down payment so we added a cosigner

and that cosigner basically said said

yep I'll sign up to show my income and

credit on this loan and guarantee that

paid so that is one option if you have

that available to you down payment for

that is about 5% down minimum most of

the time so it really is a great

strategy to then use that and then maybe

refinance what I always suggest in this

strategy is keep this loan and then the

buyer who's self-employed to then

eventually refinance into a traditional

loan so that the co borrower can get off

of that because the co part where

normally doesn't want to be on a

mortgage for very long

another option is you know use a niche

program use a bank statement program and

then refinance into a regular

traditional loan after you maybe file

taxes one more year with less deductions

so overall if you're self-employed it's

not the worst thing in the world to go

through the mortgage process it's gonna

be more documentation for you it might

be slightly more stressful and might be

a little bit longer of a process but

find the lender who's willing to

collaborate with you and help you

through understanding what can you

qualify for and what steps you need to

do you need to take if you don't qualify

for the program that you want right now

if you have any questions let me know up

and thanks so much for watching