Self Employed borrowers typically show their income through their two most recent tax returns.
Stated Income documentation programs usually allow Self Employed borrowers to obtain more financing than stated income wage earner applicants.
Self Employed borrowers may also be required to show proof of self employment through a business license, or by having a CPA write a letter stating that the borrower has been self employed for over 2 years in the same line of business.
Self-employed borrowers will be better off if they can use bank statements to show cash coming in. Lenders will use this as the gross and not use the tax returns which after write-off usually shows a much lower income amount.
Most lenders will loan up to 75% of the property's value and many will go to 90 or 95%.However some will let you have up to 100% -The amount you can borrow will vary between lenders but the rule of thumb is three times your annual earnings.
Underwriters allow higher stated incomes for self employed borrowers then they do with a w-2 stated borrower.
There are several business classifications that the self employed borrower may fall into:
- Sole Proprietorship
- Partnership
- Corporation
- S Corporation
- Limited Liability Co. (LLC)
Lenders may consider you self employed even if you are a 1099 employee. You will typically need two years as a 1099 employee and one year by exception.
Most lender banks consider a borrower self-employed if he owns more than 25% of the company he works at. The company's tax returns, profit and loss statements, and bank statements are often used to document the self-employed borrowers capability to repay the loan.
Self-employed borrowers often go stated income because their tax returns don’t reflect the actual cash flow they have available to pay their mortgage.
Stated income loan prgrams are perfect for self employed borrowers. Most self employed people will write off everything they can to minimize their tax consequence at the end of the year. This works agaisnt them when applying for a loan though. With stated income programs the borrower only has to state the amount of income he makes (not prove it) and the lender has to accept this.
