Mortgage Update for the week of May 20, 2024

This week’s update features information on mortgages for self-employed borrowers!

Quick mortgage tip for self-employed and commissioned paid individuals

Earlier today I was having a conversation with a self-employed woman who just filed her 2011 taxes prior to the October extension deadline. She’s eager to buy a home in the greater Seattle area and her 2012 income shows a continued trend higher. She’s curious as to how quickly she can use her 2012 income for qualifying.

Typically for a self-employed or commissioned paid borrower,lenders want to see the last two years complete tax returns and will basically average the last two years net income assuming their income is steady or improving.

I advised her to file her 2012 taxes as soon as possible if she’s planning on using her 2012 income for qualifying. Not only will the 2012 tax returns need to be filed before a lender can use the income, most lenders will require a the tax returns to also be verified by the IRS.

Lenders use Form 4506 to obtain a tax transcript for several reasons, in addition to verifying taxes have been filed. The tax transcripts are a summary of the tax returns which reveal items such as income and deductions for a specific year. W2 salaried employees may be caught off guard if they claim a lot of work related deductions as an underwriter will most likely deduct those “expenses” from their gross income. Any conflicts between the what has been provided to the lender and what the IRS is reported must be addressed. 

During busier times for the IRS, such as April when income tax is due, it may take several weeks to obtain tax transcripts for that year. Even if the earliest my Seattle home buyer can file is at the beginning of February, she’ll at least have a beat the April rush.

So if you’re planning on buying a home in the beginning of the year and you need your 2012 income to qualify, file your taxes early. Chances are, your lender may not be able to close without being able to obtain your transcripts. 

If you’re considering buying or refinancing your home located in Washington state, I’m happy to help you!

Documentation for Self Employed or Commission Paid Borrowers

Sonia asks via commenting on a post at The Mortgage Porter:

“I’m a first time home buyer, but I am self employed I would like to be preapproved for a mortgage loan and want to know what paper work will be required by the bank…”

Self employed borrowers will most likely need to provide the following documentation:

  • Last two years complete (all schedules) tax returns for both business and personal including W2s or 1099s.
  • Year to day profit and loss statement.
  • Bank statements, asset accounts (all pages).  Be prepared to document you have enough funds to cover your down payment and closing costs at minimum.  You may have to show proof of having reserves (additional savings remaining after closing).

Self employed borrowers need to show at least two years of income for their business.  The borrowers often income is averaged over the past two years.  If the borrowers income shows a decline from the previous year, the lower income may be used and the self employed borrower should be prepared to explain why they are showing less income to the underwriter. 

These guidelines may also apply to:

  • People who are receive commission income that accounts for 25% or more of their annual income.
  • People who own 25% or more of the company they work for.
  • Independent contractors.

If you’re a commission paid sales person, you’ll need to provide your last two years tax returns as well and those un-reimbursed business expenses are factored against you. 

When a borrower has income that has the possibility of fluctuating, they need to be able to review a period of time (two years).   Underwriters are looking for trends with any borrower’s income. 

I recently met with a newly self-employed person who wanted to take advantage of the First Time Home Buyer Tax Credit.  She’s bought her business just shy of a year ago.  Even though it’s showing great profit right now; her first year tax returns report a loss (as many new businesses do).  She does not currently qualify for a mortgage.  After she has two years tax returns (track record) her income will still be averaged with the first year loss factored in. 

The days of “stated income” or “no income verified” are gone (so are many of the lenders who offered those products).  Be prepared to fully document your income and down payment.  You’re showing the lender you have the ability to pay the mortgage with your successful two year track record as a self employed person or commission paid sales person.

I’m happy to work with self-employed or commissioned paid borrowers. Click here if you would like a rate quote for a home located anywhere in Washington.