How Self-Employed Buyers Can Get a Mortgage
When lenders calculate income to determine how much your clients will be able to afford, they always start with gross, or before-tax, income. For most borrowers, who are paid either hourly or salaried wages, this is a straightforward calculation.
When buyers are self-employed or earn part of their income in tips, the process becomes a bit more involved. These buyers may or may not be reporting all of their earnings as taxable income. But in order to use income to qualify for a mortgage, buyers must be able to document the earnings and show they are paying taxes on it.
Additionally, lenders want to see reliable earnings over time. They are looking for a pattern of income that demonstrates the buyer is able to consistently earn this amount of money. Two years of tax returns that document this income is a good place to start. If the buyer has been earning self-employed or tip income for less than this desired two-year period, he or she should still be able to use part of that income to establish approvability.
If a buyer is self-employed, the calculation that lenders use is known as adjusted gross income, or AGI. This is the buyer’s gross income minus any of the deductions that would be taken in the course of operating the business. As with the tip-earner’s income, lenders are looking for a two-year history of taxable earnings for the self-employed buyer.
If your clients’ income is based on tips, they are self-employed, or they have just started a new career, this does not necessarily mean homeownership is off the table. Contact your lender partner for more details about what options might be available.
Dave Smith MLO
2860 South 143rd Plaza
Omaha, NE 68144