Expert Advise Home Buyer Strategy Home Buyer Tips Misc Mortgage Advice Mortgage Planning Self employed

Being self-employed can be great, but before you quit your salary job, you should be absolutely sure that you will not need a mortgage in the next 2-3 years.

Lenders have very strict rules with regards to documenting income for a self-employed person.

In order for the income from the business to be eligible as “qualifying income” on a loan application, the business has to have a track record that can be verified.  In most cases, a 2 year history of filed federal tax returns showing the business income will do the trick, but there is more to consider that just that.

Many times, the first year or two of a new business can be rocky.  If that is the case, the income may not even be enough to qualify for a mortgage.  When analyzing business income from a federal tax return (schedule C), underwriters look at the adjusted income after expenses.  This amount is then averaged over the most recent two years (using 2 years of filed federal tax returns) to determine the average income.  If the income has increased each year, the total can be averaged over 2 years, however if the most recent year income is less, that years income must be used.

1099 income is always categorized as self-employed income.  1099 income does not withhold any state/federal taxes, unlike w2 income, which does.  If you switch from receiving a w2 to receiving a 1099, you are then immediately considered self-employed.  (This only matters if the 1099 income is for your primary job and this income is needed to qualify.  If 1099 income is from a secondary job that is not needed for qualifying, the 1099 income would not matter).

Filed federal tax returns are always required to document self-employment.  If you have not filed taxes, your income is not eligible until the IRS has confirmed you filed and owed taxes have been paid, or payment arrangements have been made.

S-Corp or Partnership returns for the most recent two years may also be required, depending on the borrower’s % ownership of that business.  25% or greater ownership will require copies of the full business returns for those years.

A lot can happen over a 2-3 year period, so if there is any chance of needing to sell your home, buy a home, refinance, or take out a home equity line of credit in the next few years, be sure to check with your loan officer for guidance before you quit your current job.  A little planning can go a long way.

 

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***Tax implications should be considered with self-employment.  Be sure to speak with your CPA for guidance***