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Self Employed Borrowers – Income Qualifying

Income Qualifying
Self Employed Borrowers

Self Employed or Variable income? Here is what you need to know for home loans

Picture this scenario: You decide it is time to buy a home. Your income comes from your small business and you file your taxes every year. You speak with a lender and they say, “I’m sorry but you do not have enough income to qualify.”

“Wait a second? I’m self-employed and had my best year yet!”

This is not uncommon for self-employed or variable income borrowers to experience. To qualify for traditional financing; such as FHA, VA, USDA, or Conventional mortgage loans, lenders will always require your most recent two-year tax returns to determine your income and ability-to-repay your mortgage loan. Remember, that FHA, VA, USDA and Conventional loan programs underwrite with criteria sponsored or set by government entities. If it is not filed income, it cannot be used or may result in unsustainable income.

Fortunately, there are ways to help you qualify without you losing a great deal on a home!

Getting income qualified: Self-Employed

A Lender determines your income with the last two-year’s tax returns, personal & business. If you have several businesses and are 25% owner or more of each business, submit all returns for the last two-years. One of my clients had a total of 7 businesses. We had 16 tax returns in all for their loan.

A two-year average of your net gain on the business is taken as your income. Lenders can add back items such a depreciation, depletion, and mileage for certain types of businesses such as transportation or sales oriented businesses (there are many examples).

In addition, one-time business expenses that can be documented such as a remodel of a store front or big purchase of equipment, can be added back if it is not a recurring expense. Where a self-employed borrower can run into trouble with qualifying is showing a loss in the last two-years on their business. This can result in negative income.

One Year Average on income

If you are a small business owner who has been in business more than 5 years, there is hope! Freddie Mac allows a one-year average for self-employed borrowers using Conventional financing regardless of the down payment. The lender must review the other qualifying factors such as credit and assets just to be sure. But, this may save some borrowers time and taxes in the long run.

Alternative Income review

Many lenders are now coming out with alternative loan programs to traditional financing and offering alternative ways to document self-employed or variable income. Many of these programs will call the program a “bank-statement” program. In this scenario, the last 24-36 months of business and personal bank statements will be requested, and an average deposit balance or total of deposits will be taken to determine your income. Some expenses can factor into this calculation.

This method allows banks to document and determine your ability-to-repay your mortgage without the use of tax returns. The catch is you may pay more in fees for this type of loan and have a higher interest rate than what the market is offering. It works well for business owners who have a lot of necessary deductions and expenses on their taxes and in most cases, is a tax advantage to originate a loan with a higher fee and interest rate vs paying more income taxes.


The process of buying a home with mortgage financing should always include a Lender in the very beginning of your decision. Having a discussion with the Lender will help you understand your qualifying parameters and work with your Real Estate agent. The Lender’s responsibility is to prepare and package your home loan pre-qualification ahead of any offers you submit on a home. The earlier you speak with a Lender in the homebuying process, the easier it will be to find a home and close without any headaches.

Chris Gonzalez
(480) 442-4494

Facebook: Chris Gonzalez – Your Neighborhood Lender

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