It can be quite frustrating if you do not qualify for a traditional loan due to how you file your tax returns. If you are a salaried employee, your income is calculated based on your gross, but when you are self-employed, your income is calculated based on your net. The reasoning is that you need those expenses to continue to perform and succeed in your business. So keep in mind that when you write off expenses from your gross receipts, it helps how much you pay in taxes, but hurts your qualifying ratio. There are certain line items we can add back into income, such as depreciation or “business expenses for use of home”, but that may not cut it for you.
So what are your options when you are self-employed and if you do not qualify for a traditional loan based on net income? In short, a Non-Qualified Mortgage (Non-QM) loan.
A Non-QM loan does not need to follow the Qualified Mortgage parameters, of which a main one is full income documentation with tax returns. Here are some alternative methods for income qualification with non-QM loans for self-employed individuals:
- Profit & Loss Statement: A CPA-prepared P&L for the last 12 months
- 12 or 24 months bank statements: We use the deposits as income
- 1099 only: averages 1099 income received with a 10% expense factor
- Asset Utilization: We use your liquid assets (cash, stocks/bonds) for qualifying
- Debt-Service Coverage Ratio (DSCR) program: if you are purchasing an investment property, there are no income docs required whatsoever since the rate is based on the rental income received
Each program and lender will have different parameter requirements, such as minimum down payment/equity level, minimum credit score and max qualifying ratio. Of course, these programs are considered more risky to the lender since we are not using traditional qualification means, and therefore the interest rate you pay will be higher than current market interest rates. If you are in need of traditional or untraditional financing, I can run scenarios and review the best fit and most attractive interest rate and loan terms for your situation.