There are a lot of self-employed borrowers who have been denied a mortgage loan. They are denied a loan due to self-employment and the inability to prove their income. Many self-employed individuals are faced with this issue. Being self-employed has its benefits. Although, there are drawbacks when it comes to qualifying for a mortgage loan. Business owners benefit from the many deductions from income that the tax law allows. There is a caveat to the plethora of deductions. When you are trying to qualify for a home loan there can be issues. All of those deductions, which you benefited from, can be an obstacle to getting approved for a home loan.
Many banks will use your adjusted gross income. This is the amount of income after all deductions have been allowed. For self-employed borrowers, this means that all deductions on your federal income tax return will not be allowed as income. There are exceptions to things like depreciation and depletion expenses, which are added back to your adjusted gross income. The annualized adjusted gross income from your federal income tax returns is averaged out over 12 months to calculate your monthly gross income.
When you apply for a home loan, a bank will need to ensure that you are able to repay the loan. One of the most tell tale ways a bank can see if you are able to repay your loan is by using a calculation commonly referred to as the debt-to-income ratio. You will hear this term a lot when you are applying for a mortgage loan. The debt-to-income ratio is calculate by taking your total monthly debt, including your house payment, and dividing this by your total monthly income. The total debt-to-income ratio allowed varies from bank to bank and depends upon the program in which you are qualifying. This is the reason why your monthly income is so important when you are applying for a home loan. The bank needs to see how much house you can afford.
There are many ways to qualify for a home loan if you are self-employed and unable to prove your income. You can find a house that will keep your debt-to-income ratio within the bank’s underwriting criteria. This often means buying a smaller house, a house in a less desirable neighborhood, or a house that needs repairs.
There is another way to qualify for a home loan using a program known as the 12 Month Bank Statement Program. The 12 Month Bank Statement Program uses your average income based on average bank deposits over the last 12 months. The average deposits will then be decreased by your recurring monthly business expenses. The 12 Month Bank Statement Program enables self-employed borrowers to qualify for a home loan where they would not otherwise qualify for.
About the Author:
Bob Vogel is a licensed mortgage loan originator who specializes in home loans for self-employed and credit challenged borrowers. Bob is partner of Gustan Cho Associates, a team of highly knowledgeable industry experts whose primary goal is the needs of the borrower. Call Us today at 888-900-1020 or email her at for questions on how you can qualify for a home loan if you are self-employed and are interested in the 12 month bank statement program.