Self-employed? Here’s the scoop on income verification.
Picture it: it’s the early 2000s. Lenders are casually handing out mortgages like hotcakes to subprime borrowers – individuals with poor credit histories. “But why?” you may ask. Well, that would warrant an article all of its own. By 2008, it had all come crashing down, with subprime borrowers defaulting on their loans, leaving lenders holding the bag with properties now worth less than they were at the time of purchase. Banks were in serious trouble, and The Fed had to step in with the controversial bailout bill – a $700 billion favor – to abate the financial crisis.
Needless to say, since 2008, income verification has become very important – arguably the most important factor – in qualifying for a mortgage. However, with half of millennial workers already freelancing, and that number steadily increasing, it’s important to know how to qualify when work doesn’t look like a nine-to-five.
Mortgage lenders only consider personal taxable income when qualifying you for a loan – a considerable hurdle for some workers who don’t have their income neatly bundled into a W2. If you say you earn $5,000 a month, but can only prove $3,000 a month with your tax returns, lenders will undoubtedly raise an eyebrow. Handily, some tax deductions can be added back to your income – retirement contributions, home office use, depreciation, health insurance premiums – to make the income analogous to a W2 employee’s situation.
If you own a business, or offer professional services (see: attorneys, therapists, etc.), you may be qualified with a one-year history of self-employment. If you have a proven track record in a line of work and have recently gone self-employed, you may qualify for a conventional loan – easy peasy.
But beware, not all types of self-employed income contribute to qualifying income. Sporadic or “windfall” amounts may not be considered. The lender has to deem income as stable, consistent, and ongoing for it to count towards your mortgage eligibility. So, how do you prove yourself and your income to be credible without a W2?
Technology prevails – new solutions
If you’re traditionally self-employed (e.g. you own a brick-and-mortar business), and business income fluctuates from one year to the next, you can simply provide more than just the mandatory one year of prior tax returns to show how it averages out over time.
If your income is a bit more amorphous, you’re in luck. We now have something called a bank statement loan. This is where a lender analyzes your – yep, you guessed it – bank statements. They can determine how much is coming in and out of your accounts to verify your income, which is a big win for freelancers. Have the loan amount in assets? There’s a loan for that too. And if you own a business, there’s a loan that analyzes your profits and losses to secure a mortgage as well.
That’s where Simplist comes in. Our magic machines receive the information you give us and do all the legwork for you – we analyze your cash flow and other assets, match you with lenders that are primed to meet your needs, and let you do the rest. Of course, our mortgage experts are still ready to answer any questions you might have along the way. We’ve got your back!
If you have a standard tax situation (i.e., you work for one company and make a fixed amount of money each paycheck), you’ll want to apply for a conventional mortgage in the traditional way, W2 and all. If you’re self-employed, and own a business or offer professional services, you’ll still need to provide documentation to demonstrate the income of the business. However, it’s important to remember that all business income is not qualifying income. Either way, we can eliminate the need for mountains of paperwork, making the process less arduous.
If you work freelance, you may want to utilize the benefits of a bank statement loan by applying through Simplist. We can seamlessly integrate with your online banking account to securely verify your income in the time it takes you to make a cup of coffee.
Although you must have income to qualify for a mortgage, the landscape of how that looks on paper is changing. If you have the income but aren’t sure how to prove it to a lender, Simplist can help by analyzing your cash flow and presenting your info to a variety of lenders. In short: No W2, no worries.