Thanks to an uncertain economy and job market, many people are opting to start their own businesses to help make ends meet. If you’ve recently moved from W2 status to self-employed and are planning to take advantage of today’s low mortgage interest rates, its important to understand some of the lending guidelines that may apply to your situation.
Today’s mortgage lending marketplace is dominated by Fannie Mae and FHA-insured financing, and both will have roughly the same self-employment qualification requirements. First, underwriters will want to see that you have at least a two-year history in the same line of work. It’s not typically a problem if you’ve changed from a W2 job into your own business during the last two years as long as you’ve stayed in the same or a closely related field. If you leave a W2 job and start a business in a completely unrelated field, you’ll likely need to wait until you’ve had your business for at least two years before you’ll be able to use your self-employment income to qualify.
If you’ve started a side business to supplement your existing W2 income – even if it’s in the same line of work as your job – you won’t be able to use the income to qualify until you’ve had the business for at least two years. Again, underwriters want to see a two-year track record of earning the income before they’ll allow you to use it to qualify.
The second part of the equation is verifying income. Back in the glory days of the housing boom, self-employed borrowers could take advantage of stated income programs that did not require income verification. However, things aren’t so easy anymore thanks to a much tighter lending climate. Stated income programs are all but impossible to find these days, so self-employed borrowers should expect to be asked for full corporate and personal tax returns (where applicable) – which means you’ll need to have been in business for at least a full tax year.
The income used to qualify will be the net income after all deductions, not the pretax figure. Underwriters can often add back some deductions (such as depreciation, depletion, and some other expenses), but if you write off a lot on your taxes, it could be difficult to qualify.
Qualifying with self-employment income is not as easy these days as it was a few years ago, but it you have good credit, equity in your home, and can show enough net income on your tax returns, you should be able to take advantage of today’s low rates. Hopefully as the credit crisis eases and the housing market stabilizes, self-employment qualifying guidelines will ease up as well.
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