Fannie Mae considers you self-employed if more than 25% of a business. If you are newly self-employed, you already face many challenges getting your business up and running successfully. Very few lenders are willing to add a mortgage to that challenge. So, hurdle number one is that you need to establish a track record–in most cases at least two years in your new line of work.

Second, you have to show that the business generates enough cash flow to make a mortgage payment. And keep careful records of that income. If you show revenue on your books but then deposit it into a personal account (or split it between a personal and a business account), you may not be given full credit for it. So once your business has filed a tax return or two, and you can back it up with current financial statements and bank records, the lender can take a look at your income.

There’s more to analyzing income than grabbing the bottom line off the Schedule C. Some items, like depreciation, get deducted from your taxable income but are added back for underwriting purposes. Depreciation isn’t actually money that leaves the business; you don’t pay a “depreciation bill” each month. So it counts as cash you have access to for making mortgage payments. Conversely, you’ll be adding back that exclusion for meals–underwriters assume that you eat even if you aren’t with a client! If you deduct employee business expenses on a Form 2106, those get subtracted as well.

Count your baseball card collection? Maybe. You get to count recurring capital gains–that is, earnings from investing, as long as they have been coming regularly and could be expected to continue. For example, if you discovered an old baseball card in your attic that turned out to be worth $60,000, it would be nice for you–but underwriters don’t count it as income. If you found a big stash, had them valued, then began buying, trading, and selling cards for profit, these gains would count as income.

Finally, your income has to show that you are on your way up, or at least have some kind of stability. Fannie Mae’s Self-Employeed Income Analysis form shows how your income is treated by underwriters, whether you are a sole proprietor, partner, corporate owner, or corporate employee. At the bottom, there are lines for entering your year-to-date profit and loss, which is useful if you have a two year track record but only one year’s tax return. However, Fannie states that “Year-to-date income to qualify the borrower will be considered only if that income is in line with the previous year’s earnings or if audited financial statements are provided.” So to prove that your first good year wasn’t a mere fluke, get this year-to-date’s statements audited and take credit for your success.

Kind of a pain, huh? Now you know why stated income loans were so popular in the past!

Tags: , how to get mortgage self-employed, self-employed home loan

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