Colorado’s workforce is full of independent contractors and sole proprietors. Clients who get paid and issued a Form 1099 to report their income are designated as self-employed. Income derived by self-employed borrowers is handled differently than a traditional salaried employee who receives a Form W-2. These types of borrowers may require an alternative route in their mortgage qualification process. Our branch has a knack for creating solutions for self-employed borrowers and maximizing their qualifying income.
If you fall into the self-employed category, and are looking for a home loan, we can help you navigate the process while providing superior education and appropriate advice.
Case in point, last month, I closed a loan for two self-employed borrowers (a musician and a business consultant) who needed cash out for home improvements. Even though they were denied a conventional loan through another lender, I was able to consolidate their debt and procure a cash-out refinance for them. By carefully using a combination of income sources, we were able to document sufficient income to get the loan closed, thus providing the cash flow they needed to remodel their kitchen and build a work-from-home space.
Planet Boulder’s comprehensive expertise with this “1099 demographic” has led to countless success stories. We stand by our borrowers, navigating the lending waters together, until they’re approved for a purchase loan or a refinance.
Here are some considerations for self-employed borrowers:
Two years of self-employment is generally required.
Tax returns (generally the most recent two years of personal and business) are generally required to calculate income.
Self-employed income is often reported on the Schedule C of a personal tax return (Form 1040).
Underwriting guidelines calculate self-employed income using primarily net numbers not gross (Line 31 of a schedule C).
Some loan programs may require a borrower to provide year-to-date profit and loss statements to show income stability.
Non-Qualified Mortgages (Non-QM) exist to provide creative solutions for borrowers that do not have sufficient qualifiable income for a conventional mortgage
Asset depletion is one type of Non-QM loan. It takes into consideration the face value of an allowable asset and the amortization period of the loan, then determines the qualifying income. Bank statement programs are another type which calculate an average of deposits to determine qualifying income.
Capital gains, dividends and interest, and social security can all be used to help a borrower qualify.
Schedule E income that usually filters through on a K-1 can also be used.
Investments, where borrowers own 25% of a company or greater, will require corporate tax returns.