Last week’s article “Getting a Mortgage These Days: It’s Not That Bad,” generated a lot of
questions specific to the challenges of qualifying business owners. As more of the workforce moves away from 9 to
5, W-2 employment, more potential homebuyers have a complicated task of
documenting their income for the purpose of qualifying for a mortgage.
The stated income loans of the past made qualification much
easier for self-employed borrowers.
Today, due to legislation and rules responding to the Great Recession,
all income needed to qualify for a mortgage must be documented. For business owners or individuals that work
on contract, that generally means 2 years of individual and business tax
returns must be provided to the lender for review.
Applicants that have just started a business will find it
difficult, if not impossible; to qualify as the business must have a 2 year
history of generating income. Also, since
most new businesses rarely report a profit in the first year, the tax returns
are unlikely to reflect adequate qualifying income.
One of the advantages of owning a business is having the
ability to write-off expenses related to the business from taxable income. This is wonderful for reducing tax liability,
but it also reduces the maximum loan amount that the business owner can qualify
for. The exception to this rule is
depreciation expenses. Since
depreciation is only a “paper” expense, the lender is able to add the reported
depreciation back to the applicant’s net income.
Yes, business owners must provide more documentation in
order to qualify for a mortgage, but we are closing loans for these types of
clients every day. With planning and
sound advice from a licensed mortgage professional, self-employed mortgage
applicants can navigate through the rules to qualify for and obtain a home
loan.
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