Personal Finance

Self-Employed? Here’s How to Navigate the Home Loan Process

Name: Article about how to navigate the unique home loan process for self-employed people.
Brand: Axos Bank

Dec 21, 2022

The Great Resignation has prompted increased interest in freelancing, consulting, and establishing other small businesses.

If the flexibility and independence has called your name, and you’ve become self-employed, you’ve likely experienced a change in how you manage your money. You may have also noticed larger variances in your income from month-to-month. But this doesn’t mean you have to put your dreams of homeownership on hold.

A home loan is still within reach as a self-employed homebuyer (or homeowner wanting to refinance). Even if you went solo three months ago, there may be mortgage options available for you!

But the income documentation process looks a little different for self-employed borrowers. And you may want to seek out different mortgage options than you would have with a salaried income.

Here are some tips to help you prepare for a seamless self-employed mortgage experience.

Be Prepared to Gather These Income Documents

As you prepare for a home purchase or refinance, gather these documents. They’re what most lenders will use to validate your income, which is important for DTI (debt-to-income) and ability to repay (ATR) requirements.

Tax Returns

This is based on your self-employment type, as outlined below.

Proprietor: 1040 with Schedule C
Partnership – ownership, 25% or less: 1040 with Schedule E, plus Schedule K-1
Partnership – ownership, greater than 25%: 1065, plus Schedule K-1
S-Corporation – ownership, 25% or less: 1040 with Schedule E, plus Schedule K-1
S-Corporation – ownership, greater than 25%: 1120S, plus Schedule K-1
Corporation – ownership, 25% or less: 1040 and 1120
Estates or Trusts – ownership, 25% or less: 1040 with Schedule E, plus Schedule K-1
Estates or Trusts – ownership, greater than 25%: 1041, plus Schedule K-1

Year-to-Date Profit and Loss (P&L) Statement

Be sure to provide a P&L for every self-employment company that appears on your tax return – your lender likely won’t qualify you based on just one.

Depending on your lender’s policy, you may need to supply multiple years of P&L statements. They’ll often use a 2-year average of the income if it has increased year-over-year, or a 1-year average if it has been decreasing. In this scenario, “income” is defined as net income plus add-backs like depreciation and depletion.

Seek Out Portfolio Loan Alternatives

If your ventures aren’t showing a profit, or if they’re too new to produce all the required documentation, you can save time and stress by seeking out a portfolio lender that offers alternative documentation and flexible underwriting programs.

Portfolio loans are non-conforming mortgages that aren’t sold on the secondary market. Instead, the home loan becomes part of the lender’s investment portfolio. This gives the lender greater flexibility with their mortgage underwriting guidelines. They can then be more hands-on with their underwriting methods – taking a custom approach with each borrower to establish their ability to repay.

Here are some of the ways Axos Bank works with self-employed homeowners and homebuyers through our portfolio loan programs.

1-Year Tax Return Option: If you’ve been self-employed for at least two years, we allow for a 1-year tax return. This helps reduce the paperwork so you can save time.
Bank Statement Programs: You can also qualify based on the average business-related deposits in your bank accounts over a 12- or 24-month period. We then use an expense factor based on your industry and other variables to determine your net income.
CPA-Prepared 12-Month P&L: This streamlined-documentation loan provides the flexibility of a bank statement loan but with reduced documentation requirements. It’s a great option if you utilize a CPA to file your taxes.
Blended P&L and Income Average: If a CPA-prepared P&L isn’t available, a self-prepared P&L can be reviewed along with supporting bank statements, as a convenient alternative to tax returns.
Asset Depletion: This allows you to include liquid assets in your income sources to show your ability to repay – such as trust funds, investment portfolios, retirement accounts, crypto assets, and other cash equivalents; and you get to retain these assets and pay from any source.
DSCR: If you’ll be renting out the property in question, you can opt to use the estimated net rent as an income qualifier; this eliminates the need for tax returns and P&Ls.

Do a Gut Check

Buying a home is a major financial commitment. If you’re feeling shaky about the profitability of your business or uncertain about its longevity, then proceed with caution. Create a budget, start contributing to a down payment fund, and research lenders and properties, but don’t rush the process.

If you’d like help creating a reasonable budget, take advantage of our articles and tools, including Have You Saved Enough to Buy a Home and our free property valuation estimator. Our team of mortgage experts is also available to answer your questions and provide a free consultation to review your finances and goals. You can contact them directly at 888-546-2634.

You’ve Got This

Starting a business takes grit and determination – and a lot of paperwork. Believe it or not, the heavy lifting goes a long way to prep you for the mortgage process. That practice, along with the partnership of the right lender, will make your upcoming home loan a breeze.