Proving income for mortgage qualification when you’re self employed has been an enormous challenge. Proving income is used to demonstrate a person’s ability to be able to afford their mortgage. The issue for the self-employed homebuyer is that net income on their tax returns shows what money they’ve chosen to set aside in any particular year for their own personal use. Good business owners put as much of their profits back into the business as they can afford. It keeps taxes down to lower profits, so even when gross income is high, they often don’t keep the money for their own personal use. Instead, they buy a new point-of-sale computer, upgrade office furniture, or stock up on supplies. There are many way to spend surplus cash on a business and business owners see this, rightfully, as an investment in their business’s future.
Mortgage companies want to see that a homebuyer has ample extra cash for personal use if they need it. So, they have traditionally looked at two years of tax returns. That means that if a self-employed person wants to show that they have enough extra income to comfortably afford a home, they have to start keeping profits for their own use for two years instead of adding all extra money back into the business.
This never made sense to the business owner nor to the mortgage brokers, but it was the way it worked. Around one-tenth of the nation’s workforce is self employed. So, this is a large group of potential homebuyers being forced to make unwise financial decisions just to prove that they can afford a home that everyone knows they can afford.
Finally, banks have started changing with the times. Now, there are loan products that allow self-employed workers to skip the tax return income proving and show their income using bank statements. These bank statement loans are the most accurate way to show a person’s available income. By taking two years of deposits, instead of two years of net income, lenders are able to see how much money the self-employed homebuyer actually has at their disposal.
If you’re self employed and have been denied a mortgage based on your tax returns, ask your lender to look into a bank statement loan and then come talk to us. A Marco Island home of your dreams could be just a couple months away.
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