Mortgage Loans For Self Employed Borrowers with no income tax required is now available using 12-month bank statement deposits. The past 12 months of bank statement deposits are averaged. The average monthly deposits are used as the qualified monthly income. Withdrawals are not taken into account.
When the Lender Says Borrower is Self-Employed, the team at Loan Consultants are experts in originating and funding Mortgage Loans For Self Employed Borrowers with no tax returns required.
When lenders first review a mortgage loan application one of the most important elements is monthly income. Loan programs provide lenders with guidelines used to determine affordability primarily by comparing monthly credit obligations with gross monthly income. This comparison is referred to as a percentage called a debt ratio and most lending guidelines ask that total monthly debt be somewhere around 43 percent of monthly income.
Monthly debts used in this calculation include the mortgage payment in addition to the monthly allotment to property taxes and insurance as well as a monthly mortgage insurance payment when needed. Other debts included in this calculation are those that would appear on a credit report such as a car payment or a credit card payment or installment loan. If there are any spousal or child support payments required, those are also included if those payments are to last more than two years.
As it relates to income, it’s relatively easy to arrive at this figure. Borrowers are asked to provide their most recent paycheck stubs covering a 30 day period. The figure used to calculate debt ratios is the gross monthly income, before any withholdings are taken out. In addition, the lender reviews the year-to-date amount and compares it to the monthly earnings. This number should be consistent.
For example, if the latest paycheck stub was issued on September 30 and gross monthly income is $5,000, the year-to-date total should be $45,000, or nine months X $5,000. If the numbers don’t match up, the lender will require some explanation and documentation regarding the difference.
Other income may also be used to help qualify under certain circumstances. On the loan application, there are spaces provided that allow borrowers to enter not just income from an employer, but also from overtime earnings, bonuses, commissions, dividends and interest, and any net rental income. These additional types of earnings take a bit more verification but they all follow the same basic pattern
Earnings must have at least a two-year history and the lender must make the determination the earnings will continue into the future. For example, a borrower gets paid $20.00 per hour for a 40 hour week and $30 per hour for any hours after that. When the lender reviews a paycheck stub and sees both hourly earnings and overtime.
The lender will then review the last two years of income tax returns and W2 forms to see a history of overtime income. The lender could then make a reasonable determination that because there is a two-year history of overtime it’s likely the overtime earnings will continue and the lender can use the overtime income to help qualify.
The very same method applies to commissions, dividends, interest, bonus, and rental income. With rental income, lenders refer directly to the last two years of income tax returns and use the net amount listed on Schedule E of the returns. When verifying two years of rental income, the two years of returns provide evidence the borrower has at least two years of experience as a landlord, a requirement for most mortgage programs, but also provide evidence that considering a two-year history of income there is a likelihood the income will continue.
Another area that can sometimes confuse borrowers is how lenders treat bonus income. Bonus income can be used to help qualify but it depends upon the nature of the bonus. If the bonus appears to be spotty with no consistency it’s likely the income can’t be used. However, if someone gets paid a quarterly bonus based upon performance or some other benchmark if the bonus income is indeed consistent lenders can likely count it.
When the loan officer provides borrowers with a list of documentation needed to proceed with loan application, the paycheck stubs, and W2 forms were on the list. The pay check stub shows the employer pays the employee $4,000 per month but the employee also receives commissions in the amount of $1,500 per month, the employee is considered self-employed in the lender’s eyes, even though you work for someone else. Why? Because the commission income exceeds 25% of your total income.
When income other than from base pay exceeds that amount, lenders underwrite the loan similar to how a self-employed borrower would be underwritten. Mortgage loan applicants will be asked to provide the two most recent federal income tax returns as well as a signature on IRS form 4506-T. This IRS form allows the lender to request copies of the last two tax transcripts from the IRS. By doing so, the lender is able to verify the income listed on the loan application and copies tax returns with what is on file with the IRS. It’s important to note here that only the transcripts on file with the IRS can be retrieved. This means even though tax returns have been filed they won’t automatically be listed as received by the IRS. The filing date and the IRS date will be different.
When lenders review your tax returns and validate the monthly income, it’s important to note that any non-reimbursed employee expenses will be deducted from borrowers income. For instance, if a mortgage applicant took three clients out for a round of golf and spent $350 on green fees. This amount will be deducted from the stated income. Such deductions from income will be listed on Schedule C of the tax return. This means pay check stubs and W2 forms won’t show non-reimbursed employee expenses but they do need to be accounted for.
Many folks are not sure how to calculate monthly income for qualifying purposes. This is because they do receive a sizable amount of commissions or bonuses or any other type of income, their loan officer can help walk through the process. It’s important to make sure to get this information first hand and early on before beginning shopping for a home. Doing so means having a pre-approval letter in hand and any income issues have all been resolved.
The team at Loan Consultants are experts in originating and funding Bank Statement Loans For Self Employed Borrowers.
Here is how income is calculated on bank statement loans:
The average monthly deposit over the past 12 months is the figure used as the monthly income. No income tax returns are required. There is no maximum loan limit. 20% down payment on home purchase and 80% LTV on cash-out refinance and rate and term refinance mortgages.