An estimated one-third of all employees in the United States work part time or full-time as freelancers or contract workers, according to Gallup. Self-employment can be alluring for many reasons, but it can make borrowing money to buy a home more complicated.
Individuals who have been self-employed for at least two years and can provide tax returns that show steady or increasing income that is sufficient to repay the loan should be able to qualify. One problem is that tax returns don’t always show the full income of someone who is self-employed because of their business deductions.
We asked Raymond Eshaghian, founder and president of Greenbox Loans in Los Angeles, to discuss an alternative mortgage option for self-employed borrowers.
“Some lenders have stepped up with mortgage options for the self-employed,’’ Eshaghian said in an e-mail. “My company offers bank statement loans that are specifically for self-employed borrowers. Unfortunately, there are many self-employed workers that are currently renting and they’re not aware that these loan programs exist, so they don’t think they can buy a home.’’
Eshaghian said that self-employed borrowers using bank statements need to provide 12 to 24 months worth and/or a profit-and-loss statement to show that they have the income to afford the mortgage payments on the home they want to purchase. To qualify, those borrowers need to have been self-employed for a minimum of two years, even on the 12-month bank statement program.
“We do not look at tax returns at all for our bank statement loan programs,’’ he wrote. “In fact, if a loan comes in with tax returns, we have to use the income on the tax returns and can no longer provide a bank statement loan. The income often reported by self-employed people on their tax returns is less than their true earnings because they are allowed to take advantage of tax deductions for the self-employed, which reduces their taxable income. That is why they are usually better off with a bank statement loan.’’
Self-employed borrowers with a FICO credit score as low as 580 may qualify for a loan with a 20 percent down payment if they can provide 24 months of bank statements proving they can afford the loan payments with Greenbox Loans. Borrowers with a FICO score of 720 or above may qualify for a mortgage with a 10 percent down payment and a typically lower interest rate.
Eshaghian has several recommendations for self-employed home buyers:
“They need to make sure they do not have an excessive number of ‘non-sufficient funds’ or overdrafts on their bank statements,’’ he wrote. “If you have too many of either, it shows a lack of financial management, and lenders have limited tolerance for that. It undercuts the whole concept of using bank statements to determine income. I also advise people to get organized and make sure they have all their documents, including bank statements, in order.’’
The bottom line: If you’re self-employed, consult a lender to discuss your specific circumstances and find out what type of loan options are available.