With our current booming economy, more and borrowers are starting businesses or taking on freelance work. That’s a great thing for the economy, but not so great when applying for a loan. Here are some pointers when applying for a loan as a self-employed borrower:
- Are you 100% owner of the company?
- Did you pay yourself as a W2 or a 1099 employee?
- Are you using the business funds for your down payment?
- Have you been in business for minimum of 2 years?
- Did your income decrease from the previous year?
1. If you are not 100% owner of the company, but are trying to use company income to qualify, the lender will not allow 100% of the income to be used for qualification. Usually, when you open a Corp or an LLC with two or more people, you must specify the percentage amount of ownership. This is the amount you can use to qualify. If you do receive a salary from the company, then that salary can be used as your personal income in addition to your percentage of the profit from the company.
2. If you have paid yourself W2 and are less than 25% owner of the company, then you can use the most recent W2 income to qualify instead of averaging the two years. If you have paid yourself a 1099, then a two-year average is needed to qualify.
3. You can use business funds for your down payment. It is better if you are 100% owner, but if not, the other partners/shareholders must write a letter of explanation informing the lender that the withdrawal of funds will not harm the company in any way.
4. Most lenders require the business to be open for a minimum of two years. I have had a situation where the borrower has closed his business and started another one because he/she failed to pay the annual corporation fee. By doing that, they could not use the previous company to fill in the two-year history. If you need to open up a new company, one way is to have the new company take over the old company as an asset, and then you can document continuation and support the two-year work history.
5. I have had situations where the income from the previous year was more than the recent year. Most lenders tend to shy away from these borrowers. To circumvent this, you may be able to write a letter of explanation based on a hardship which was not under your control. If you can provide a current P&L Statement showing the income is equal or more than the previous years, then the lender may consider it.
I Hope these tips help you in your goal of home ownership. To read our latest blog post, click here If you have any questions, please contact us (407) 930-4490. We are happy to help.