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.