In our last couple of posts, we have been talking about the rules for documenting different types of income. In the first post, we learned that we are always going to have to provide proof of the following:
- That you have a history of receiving the income
- That you are currently receiving the income
- That you will continue to receive the income
In our first week, we talked about how to pull this off for someone who is paid a salary. Last week, we talked about how to jump through these hoops if you are on a fixed income.
This week, we will talk about how to document these three facts if you are self-employed.
- The first thing we have to do is prove your history of receiving this income. Most often, the loan program will require that we provide your prior two years’ worth of tax returns to either show your Schedule C income or to show your Schedule K returns (depending on which type of business you own). Sometimes, however, this is not a true representation of how much money you actually earned. Commonly, your tax returns will have expenses or costs that did not actually occur in the real world, but did matter for taxing purposes (things, for example, like increase in value of equity, or things like depreciating assets). Because of this, there are a few different loan programs that will allow us to document this differently by provided your prior 12 months’ worth of bank statements so that we can show the pattern of incoming money to your personal account from your business.
- On almost all loans, you will need to provide your last two months’ worth of bank statements. There are different reasons for this in each of the loan types, but in 95% of all loan, you will need to provide these. This makes it easy for us on the second data point, because the way that we prove that you are currently receiving this income is commonly just by providing those same two months’ worth of bank statements.
- The last data point is definitely the most tricky. The likelihood of your continuing to receive income is going to be directly tied to the likelihood of the ongoing success of your business. However, it is not within the scope of the underwriter to make a judgement call on the viability of continued business. As such, the guidelines are written in a way that allows the underwriter to make a simple calculation and have a black or white answer. First, we are going to need to provide the underwriter with a YTD profit and loss statement. This may sound overwhelming if you have a small business, but it really is not. All you need to do is write up a ledger of the total amount of expenses and total amount of revenue for each month of the year that you are applying for a new home loan in. Finally, the underwriter will have everything that they need. Instead of looking at how much you are making right now, and then trying to determine if this is reasonable to continue, the underwriter will instead take the three data points that we have provided and calculate an average.
They will take the amount earned on your tax returns along with the amount earned so far in this year and average this amount of monthly income over the time period of the income provided. This is not a true representation of how much you are earning, but it is the amount that they will use as your monthly income to qualify for the loan. I hope we’ve helped sort out what you will need to prove when it comes to a new mortgage, but if we’ve left anything out, just reach out to us and we will be happy to take a look at your specific circumstances and help point you in the right direction!