According to a study by LoanBud conducted by Pollfish, 53% of self-employed people struggle to get a mortgage because of their tax returns. This is because most banks only look at the net income on tax returns when qualifying someone for a loan, leaving self-employed people without options.
Don't worry. This article outlines all you need to know to get approved for a mortgage without tax returns.
What is a no-income-verification mortgage?
A no-income verification mortgage allows you to qualify for a home loan without using any personal income on tax returns.
Here are a few types of no-income-verification mortgages:
- Bank Statement Mortgage: Use your bank statements instead of tax returns to qualify your income
- Asset Based Mortgage: Qualify based on your assets instead of your income
- No-Income, No-Asset Loans
- Types of Non-Doc mortgage
Here are the main points we cover:
1. Know Your Options
2. Get an Up Front Income Analysis
3. Find a Lender With Bank Statement Loan Experience
4. Do Not Forego Writeoffs
5. Preserve Liquidity
Tip 1: Know Your Options
You Don't Need Tax Returns to Qualify
The number one mistake most self-employed home buyers make when applying for a mortgage is using only their tax returns to qualify their income because they did not know their options.
As a self-employed applicant, if you only use tax returns, your chances of getting denied are much greater. When you provide your tax returns, lenders look at your “net” income after all write-offs rather than your gross receipts. In many cases, this net income after deductions is insufficient to qualify for the desired loan amount.
You need a way to qualify without tax returns and underwrite your income up front, so you can have confidence that your loan will close.
If you have liquid assets, qualify based on your assets instead of your income so you can get approved and close on your home.
Find a Lender With Flexible Qualifying Options
While it is true that the vast majority of banks (including all of the “big box” lenders) require self-employed borrowers to provide two years of tax returns, it doesn’t mean that is the only way to document your income. The truth is that some banks specialize in loans for business owners, freelancers, and entrepreneurs and offer more flexible qualifying options. These banks understand that self-employed people need more ways to qualify than just tax returns. If you can use alternative documentation to qualify for a mortgage, it will ensure your odds of approval are much greater. This includes bank statements, 1099s, and assets.
Tip 2: Get an Up Front Income Analysis
In the LoanBud study conducted by Pollfish, over 50% of self-employed applicants who were given a mortgage pre-approval were later denied by the same lender. How is this possible? Most lenders do not analyze and underwrite a borrower’s income up front, before your loan is submitted to underwriting.
Did you know that most loan officers are given authority to issue you a preapproval letter without your loan ever being underwritten?
What many people don’t know is your loan could later be denied by underwriting, with zero recourse or accountability by the “pre-approval” issuing lender. Online approvals are even more dangerous. We live in a day in age where lenders want to provide speed, but if you enter your income (at least what you think it is) into an online application and you’re given an instant pre-approval letter, you can use that to enter into a legally binding agreement to purchase a home, without anyone ever analyzing your income documents, tax returns, profit & loss statements, balance sheets, and other financial information.
Tip 3: Find a Lender with Bank Statement Mortgage Experience
Most lenders do not have flexible mortgage programs for entrepreneurs and freelancers, and even fewer specialize in them. Unlike conventional mortgages, bank statements and/or 1099- only loans are manually underwritten and must be properly structured and presented to underwriting to have the highest chance of approval.
Even if your local broker claims to offer bank statement mortgages, they likely have very limited experience with actually processing and closing them. You certainly do not want to be their guinea pig.
Tip 4: Do Not Forego Write-offs
If you are self-employed, we understand you don’t want to pay more taxes than you need to. So if you’ve thought about paying more in taxes just to get a mortgage, we have good news. There are better ways to qualify.
Alternative income mortgage programs can come with a slightly higher interest rate - typically 1% - 2% higher than prevailing conventional interest rates. But for most people, paying a slightly higher interest rate is better than writing a $30,000+ check to the IRS for taxes.
Tip 5: Preserve Liquidity
Cash is king, and as a self-employed person, your cash is the fuel you need to grow your business. One common mistake self-employed borrowers make is putting too much money down on a real estate purchase. You need to have cash on hand to invest in your business and a safety net in the event of a slowdown. With a large down payment on a home purchase, you are sacrificing liquidity that could otherwise be invested back into your business and make you more money.
What is the best way for self-employed home buyers to secure a lower down payment for a mortgage? You need a mortgage company that will offer you more ways to qualify.
Want to read more? To download The Ultimate Guide To Getting A Mortgage Without Tax Returns Click Here.