Qualifying for a mortgage can be more complex for someone who does not have pay stubs and a W2 form to verify consistent income. If you’re an entrepreneur with your own business and fall into this category, don’t worry—there are loans for you. You just need to know how to navigate. I asked RPM’s EVP, Julian Hebron, to explain how specialized loan products serve the specific needs of self-employed home buyers.
AM: What can a self-employed borrower expect to submit to qualify for a mortgage and how do specialized loan products help?
JH: If you’re self-employed, RPM has specialized loan products that consider the intricacies of your income stream. By following sensible guidelines we’ve been able to limit the amount of documentation required and offer more flexible borrowing options while still limiting your risk.
Through our Bank Statement Program, income can be calculated using 12-24 months of bank statements. No tax returns are necessary and no mortgage insurance is required. Twelve months’ worth of bank statements are required on purchase prices up to $2.5 million with 20% down, and 24 months’ worth of statements are required on purchase prices up to $2.2 million with 10% down.
Alternatively, if you have been self-employed for a minimum of two years, you can apply through our One Year Tax Return Program, which requires just one year of tax returns to calculate income.
AM: What can self-employed borrowers be expected to contribute toward a down payment?
JH: Down payment varies based on borrower profile, purchase price and loan product. But our programs are designed to offer down payment flexibility. As noted above, if you submit bank statements for income verification, down payments as low as 10% may be accepted, depending on your purchase price. If you have been self-employed for a minimum of two years, you may qualify for our One Year Tax Return program which requires a 20% down payment for purchase prices up to $1.8 million. This program also may allow use of business funds or reserves for a down payment. This is a common sense feature that considers that a good amount of a self-employed borrower’s wealth may be in their business.
AM: What is your advice to someone who is concerned about their DTI ratio (used by the lender to determine if they can afford to repay the loan)?
JH: Be careful with your deductions. If you take a lot of deductions, you end up showing less net income on your returns which can negatively impact your DTI. Your accountant and your loan advisor can help you determine how to file tax returns to balance out tax efficiency with loan qualifying requirements.
AM: What about credit score?
JH: As with any loan, rates and availability of flexible approval guidelines will improve with higher credit scores. To monitor things that may be impacting your credit score you can use annualcreditreport.com for free once per year. This is the only free credit monitoring service that’s sanctioned by the Federal government. This free report won’t give you a credit score, but it will show you all open and closed accounts on your credit history. You can keep your score high by correcting any irregularities such as late payments, collections, or accounts that you don’t know about.
AM: What do borrowers need to know about the updated self-employment income calculation guidelines issued by Fannie Mae in February of 2016?
JH: In short, these new rules take a closer look at self-employment track records and how income is categorized on tax returns of business owners. I recently addressed this topic in my bi-weekly Zillow column. The article, titled New Mortgage Rules for Self-Employed Borrowers, walks through what you need to know. A local lender can help you analyze your tax returns and guide you toward your goal of home ownership!