Scott Leif Sheds Light On How to Secure the Best Mortgage When Self Employed
If you are self-employed, chances are you take advantage of tax deductions to keep your taxable income
to a minimum. While there is nothing wrong, unethical or illegal about doing that, it can present some
problems when buying a home. There is an old joke in the mortgage industry; “You can lie to Uncle Sam
or you can Lie to the bank, but you can’t lie to both”. Let’s see what that means.
A lender needs to qualify a buyer on their taxable income. That means the lender will look at your
income after you take all of your deductions. In most cases, a lender will also look at your last two tax
filings and average the income, assuming the income increased. If the income decreased, a lender will
only use the most recent year’s income.
If this describes your income, you might want to explore “alternative” documentation. One of the more
popular avenues to get around your tax returns are bank statement loans. This allows the buyer to use
their bank statements as income. The lender adds all the deposits in the statement and averages that
out to count as monthly income. You’ll typically need to submit 12 to 24 months’ worth of bank
statements for this type of program. It will require all the bank statements be from the same account,
either business or personal. No “mix and match”.
To determine which is best for you, a lender should always take a look at traditional full documentation
first. That’s because a conforming loan will get you better interest rates. You do pay a premium for
these niche programs. Bank statement programs fall under the category of what is called non-qualified
or “Non-QM” mortgages. Those are loans that don’t conform to the guidelines of Fannie Mae and
Freddie Mac. Fannie and Freddie are the government sponsored entities that back most of the
mortgages written in the USA.
Questions? I’m here to help.
Vice President of Mortgage Lending