Business owners, freelancers, and entrepreneurs face unique challenges when applying for a mortgage. This is because mortgage lenders will typically use the "net" income as reported on a self-employed person's tax returns, which, after taking advantage of tax deductions and write-offs, may be substantially lower than what is needed to qualify for a mortgage. Unlike W-2 employees, who have more straightforward wages, self-employed borrowers have a complex income structure which can lead to issues once the loan is underwritten. Unfortunately, this underwriting does not typically occur until after a self-employed person is already under contract to purchase a home. In a recent survey by LoanBud conducted by Pollfish, of the 521 self-employed respondents, 50.29% reported receiving a pre-approval letter and later being denied the mortgage. For many business owners, freelancers, and entrepreneurs, utilizing alternative income documentation such as bank statements or 1099's instead of tax returns can be the difference between being approved or denied. Here, we will take a look at how you can use your bank account or 1099's to qualify for a mortgage without tax returns when you are self-employed.
Why Self-Employed Have a Harder Time Getting a Mortgage
When you are a W-2 employee, mortgage lenders are more likely to lend to you because they consider that income easier to verify and steadier. It can be harder for a mortgage lender to verify that a self-employed person has a steady and stable income. Business expenses, deductions, and write-offs are are counted against your taxable income, which can impact ones ability to get a mortgage loan.
What Counts as Self-Employed for a Mortgage?
You might be wondering if you are considered self-employed or not, and since that can impact your ability to get a mortgage loan, let's take a quick look at what is considered self-employed. If you own at least 25% of a business, you are considered self-employed. If you are an independent contractor, freelancer, or gig worker, you are considered self-employed when applying for a mortgage. If you work for a company that gives you a 1099 form for your services, you will also be considered self-employed. In these instances, you will likely file a Schedule C on your individual 1040 tax returns, and the lender will use the net income (or loss) that is reported after all deductions and expenses.
What Happens if My Mortgage is Denied in Underwriting?
When you own a business, you want to take as many tax write-offs as you can possibly get. However, when a mortgage lender looks at your tax returns, they will see that your taxable income is lower than your gross income. This can make it so that you are ineligible for a loan, and if your lender does not allow you to use another method of proving your income — like your bank statements — then you are stuck finding a new lender.
What can make something like this even more problematic is that many lenders, especially big box banks and online lenders, will not underwrite your tax information when you apply; they just give you a pre-approval based on the income you enter into the loan application and call it a day. Then, when your application is sent to an underwriter after you have entered a contract to buy a home, you may end up not being qualified for the loan and have to attempt to back out of the contract or scramble to find another lender. In many cases, the seller must agree to an extension of the contract closing date, and depending on the contingencies and wording of the contract, the buyer may be in a very difficult position if the seller declines to extend the contract. If the seller does not extend, you the self-employed buyer could lose the home, forfeit their earnest money deposit, and have wasted time and money on appraisals and inspection fees. Needless to say, the stakes couldn't be higher.
Using Bank Statements to Qualify for a Mortgage
In a LoanBud survey conducted by Pollfish, of the 521 self-employed people we surveyed who have tried to get a mortgage, 52.98% of them had trouble qualifying for a mortgage with just their tax returns, with 62.57% stating they wished their lender gave them other ways to qualify besides using tax returns. Most lenders do not provide entrepreneurs and freelancers alternative ways to prove their income. However, if they were given the opportunity to provide another way to prove their income, there would be more self-employed people qualifying for mortgages.
There are a small number of lenders such as LoanBud that allow their self-employed applicants to utilize bank statements instead of tax returns to qualify for a mortgage. When using bank statements to qualify for a mortgage, the borrower must provide 12 to 24 months of either business or personal bank statements. The lender will use 50 to 85 percent of the total deposits over that period. Entrepreneurs who own multiple businesses can provide business bank statements for each business. This method, known as a bank statement mortgage, can oftentimes give a self-employed person a significantly higher qualifying income. It can increase a business owner's purchasing power and allow them to buy a more desirable home. Bank statement mortgages can be used for both purchases and refinances.
As the gig economy grows, it is becoming increasingly important for mortgage lenders to give the self-employed a way to qualify for a mortgage loan using bank statements instead of tax information. Loans using bank statements are designed for anyone who is considered self-employed and allows you to use deposits instead of tax returns to prove your income.
What Mortgage Lenders Look for on Your Bank Statements
When a mortgage lender examines your bank statements to determine if you are eligible for a bank statement mortgage loan, there are a few things they will be looking for. These include:
- A positive bank account balance.
- Regular monthly deposits.
- Little to no overdrafts or NSFs.
- Enough money to cover the down payment, closing costs, and several months of mortgage payments.
- Large deposits may need to be explained and sourced as business income.
The lender will only count deposits that are business income. Refunds, credits, reversals, or transfers between accounts cannot typically be treated as income unless they can be sourced as business income.
It is important to have separate accounts for your personal and business finances separated so that a mortgage lender has an easier time telling the difference between your expenses, and can more clearly see your income. Plus, having your money for down payments, closing costs, and several months of mortgage payments in an account separate from your business account gives them a better picture of your finances and risks. If utilizing business funds for the closing, the lender will usually request a letter from your CPA stating the use of business funds will not have a negative impact on your business.
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Using 1099's Instead of Tax Returns to Qualify for a Mortgage
There is a very short list of lenders such as LoanBud that will allow freelancers, consultants, gig workers and other self-employed people to qualify for a mortgage using 1099 statements instead of tax returns. Using 1099's instead of tax returns to qualify for a mortgage can sometimes be the difference between being approved or denied for a mortgage. Lenders can use up to 100% of the 1099 income to qualify, without looking at tax returns or the net income as reported on Schedule C.
Here is what is required for a 1099-only mortgage loan:
- Last 2 years of 1099 statements
- Year-to-date earnings statement summarizing earnings for this year
- IRS transcripts are pulled by the lender to verify the 1099 income only
- Full tax return transcripts that show deductions and net taxable income are not required
- Tax returns are not needed
- Letter from your CPA or Business License to confirm your status as self-employed
Other Requirements for a Self-Employed Mortgage
A mortgage lender will also want to know how long you have been self-employed. Typically a self-employed borrower must have been in business for at least two years. However, sometimes a lender will consider you for a mortgage loan if you have been in business for less time if you have a background in the field. For example, if you are a web designer and you worked at a business for a few years before deciding to go freelance, and you are still doing the same thing, that is something that lenders like LoanBud will take into consideration. This is something that is approved on a case-by-case basis.
The minimum FICO score is 620 for a bank statement mortgage or a 1099 mortgage. When purchasing a home using alternative income documentation, the minimum down payment will be 10% of the sales price. Loan amounts can go as high as $10 million, giving business owners, freelancers, and entrepreneurs the ability to use a bank statement mortgage to purchase their dream home.
The Need for Bank Statement Mortgage Loans to Qualify the Self-Employed
Unfortunately, when it comes to self-employed borrowers, there is a stereotype that they have a less predictable income than a W-2 employee has, so they are considered high risk by mortgage lenders. This stereotype makes it harder for someone who is self-employed to obtain a mortgage loan, but it is not impossible.
Getting a mortgage loan using your bank statements requires a little more paperwork than using your tax returns, but for the self-employed, sometimes that is the only way that you can get a mortgage loan. If you have a good credit score — many lenders require a score of at least 620 — the biggest challenge you may face is finding a lender who offers ways to qualify for a mortgage without tax returns.
Since big box banks do not analyze your income until you are under contract, LoanBud realized that the self-employed needed a more reliable way to get a mortgage. We will send your information to an underwriter before we pre-approve you for a loan. If your tax information alone will not be enough to help you qualify, we offer alternative ways to get a mortgage, including using your bank statements or 1099 statements. You will not need to cross your fingers and hope that you qualify when you are already under contract to buy a home; you will have the confidence knowing your income has already been approved.
If you are a business owner, freelancer, or entrepreneur and want to buy your own home, LoanBud is your mortgage partner. We understand the complexities of a self-employed person's income, and our experts will underwrite your loan before giving you a pre-approval. We do this because there is a need for the self-employed to get reliable loans and not be left hanging by a mortgage lender who pre-approved without actually analyzing their income. This means that you will not find out halfway through the process of buying a home that you do not actually qualify for the loan and scramble to find a loan at the last minute. In a hot real estate market like we are currently in, many sellers will not be willing to wait for you to find a new loan; they will choose to sell the house to someone else. You can end up losing your earnest money because of lenders doing this, and the mortgage loan officer who gave you the pre-approval is not responsible for you losing the loan because they did not analyze your finances first.
Too many mortgage lenders prioritize speed over accuracy, and they are willing to quickly hand out pre-approvals without verifying anything. LoanBud wants to give you an accurate pre-approval by sending your application to our underwriters to be analyzed before we approve you. With LoanBud, you will get an underwritten pre-approval and not have a sudden denial sneak up on you when you are in the middle of closing on the home sale.
LoanBud is here to make the mortgage process easier for the self-employed. If you are planning on buying a new home, contact LoanBud today. Our experts will ensure your pre-approval letter is significantly more accurate than you would get from a big box bank or mortgage lender that does not specialize in mortgages for the self-employed. In addition to using your bank statements to prove your income for a mortgage loan with LoanBud, you can also use your 1099s instead. We offer multiple ways for the self-employed to prove their income because we understand that calculating income for the self-employed is complex and that sometimes tax documents just do not cut it.