When purchasing a home, three main components determine your eligibility. They are income, down payment, and credit history. It gets complicated (especially for those outside the industry) because each is interrelated and interdependent. Think of guidelines more like a cobweb than a neat and linear web. This makes it particularly hard to get a straight answer on what it takes to qualify for a primary home mortgage. Being self-employed can exacerbate the issue.
Qualifying income from a self-employed client can bring challenges. The method of calculating income can change depending on the loan program or even how long a business has been open. Understanding how to document that income becomes critical. Many options relate to the down payment. The more down payment and better credit you have, the more flexible options become available.
We’ve outlined the best ways to qualify your self-employed income depending on your specific down payment. This list combines the most flexible qualifying methods with the loans that produce the best terms in each bracket.
3.5% Down payment:
With a 3.5% down payment or less, the only decent options to purchase are using an FHA or VA loan. Since both of these loans are insured/guaranteed by the federal government, they require a rigid two-year average of income reported on the last two tax returns to qualify. If income is increasing, it is averaged between the two years. If income decreases between the years, you use the lower amount and possibly disqualify it altogether.
On the positive side, these loans are very flexible with damaged credit.
5.0% Down payment:
Increasing from 3.5% down to 5.0% down can open up options. This allows us to use our favorite way of qualifying: one year’s tax returns. If your business has been open for 5 years, and your credit is above average, we will likely use only one year’s taxes instead of the two-year requirement. This allows us to discard the older tax return and work off the most recent year’s filing. Every year your business has a clean slate.
This gives us access to prime, conventional, 30 yr fixed loans that everyone wants, with the least amount of documentation.
10% Down payment:
Using 10% down, the best loan option is likely still a conventional loan with one year’s taxes. However, 10% down is the minimum required down payment to allow us access to programs that use deposits in business bank statements as income. These programs disregard all tax return information and will focus on consistent business-related deposits averaged over 12 or 24 mos. An expense factor is applied to the total deposits to determine “effective income.” This is the lowest down payment option when not using tax returns to qualify.
Using bank statements for income with this lower down payment comes with a cost. The rates for these programs are just about 4.0% higher than a comparable conventional loan that would use tax returns.
20% – Down payment:
This gives us the most expansive options. The best choice for terms will still be the use of one year’s taxes. However, the bank statement option improves to be just about 2.0% higher in rate to a comparable conventional loan. Besides bank statement programs, several other programs don’t require tax returns to qualify. There are even actual “no-doc” loans for both primary home and investment properties. If you have 20% down, there is almost certainly going to be a loan that will allow you to qualify. The critical issue will be determining which program has the best offerings for your situation.
Navigating the specific options for your situation can be nuanced. This is our primary role. We listen to your circumstances, understand your goals, and help you plan the best way to qualify for loans that fit your needs. We’ll then walk you through it with the lender all the way through loan funding.
Contact us today!