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Tax Hurdles and Alternative Documentation for the Self-Employed

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‘Self-employed’ is a term generally associated with anyone who doesn’t hold down an office job with regular hours. In this sense, it includes home-based employees and freelancers. To avoid confusion and to serve the purpose of this article, let’s identify the self-employed individual as someone who owns and runs their own business, in whatever that might be.

Perks of the self-employed

There are definite perks to running your own business. Whether you sell products or offer a particular service, you are your own boss. You work on your own time and are in control of every aspect of your enterprise. You can design operational processes and decide who to hire.

Profit? You get all of it of course. You are your own employer so you reap financial benefits from the money that the business makes.

Tax hurdles and such

Being self-employed may prove advantageous in most areas. However, this isn’t usually the case when it comes to financing a home purchase. Income verification is an essential step in the underwriting process. The lender seeks to find out if you have the financial ability to repay the loan based on the supporting paperwork. A tax form is a document that gives the underwriter an insight as to what your income is really like.

Submitting tax forms can be tricky when you’re self-employed. Normally, taxpayers have a tendency to maximize their deductions. This strategy doesn’t work well for business owners or freelancers because more deductions mean less income. And less income may reduce your chance of being approved to borrow a specific amount of money.

Ace that loan application with tips from reputable lenders.

What options are there?

There are a number of ways to get around the dilemma above.

  1. Leave some deductions on the table

To better your chances for a home loan, leave some of those business-related expenses on the table. Not declaring each and every bit of cost incurred in running your business keeps the income stated on your tax form within a reasonable amount. Find information for filing taxes as a self-employed individual here.

  1. Look into home loans requiring alternative documentation

Barely verified mortgage applications are a thing of the past. But some lenders are offering alternative products to the self-employed borrower. Collectively, they are known as non-qualified loans. Unlike traditional loans, these financial products are more flexible when it comes to paperwork. In some cases, little to no down payment is required.

One product in particular, the stated income loan, allows you to put down your income on the application form but doesn’t necessarily request tax forms and paystubs.

Browse through this website to learn more about stated income loans. Or talk to one of our lenders.

4 Stated Income Loan Facts You Need to Be Aware Of

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It’s easy to see why a stated income loan appeals to someone who is self-employed. A lender offering this won’t be after your W-2 statements or paystubs. He’ll look at the income on your application form without question. Well, most of the time anyway.

In the real world, a stated income loan is not as straightforward as most people make it out to be. If this is an option you’ve been considering, best orient yourself with a few facts.

1. A stated income loan has different versions.

The term ‘stated income’ is often used in the most general terms, like the ‘no doc’ loan. However, this financial product can be packaged differently, depending on the borrower’s circumstances. A lender may offer two different proposals to individuals who technically qualify for a stated income loan.

»Alternative loan options for the self-employed borrower.»

2. Lenders may not always take your word for it.

Your lender may accept the income you’ve written down on the form, but this doesn’t guarantee that you’ll get the loan. Your application may be subject for review so you still need to be ready with documents that show just how much you make.

3. It could cost you more.

Banks and private lenders offering stated income loan programs often deal with borrowers who have substantial credit and significant equity on their current home. Even so, the lender is still at risk because such applications do not require full documentation. Financial institutions will pass on that risk to the borrower, in the form of a higher interest rate.

4. A stated income loan saves you time. But do you really need to save such time?

Borrowers benefit from a shorter processing time with this loan because verification is (mostly) eliminated. Still, you should consider if this will be helpful to you at all. Neither you nor the buyer is likely to want the settlement concluded next week since you’ll both need time to prepare for the move.

»Speak with one of our experts to know the best financial product for your needs.»

For the Self-Employed Borrower: Getting that First Mortgage

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A couple of years ago, the self-employed borrower’s chances of getting a loan were nil. Today, the odds have decidedly improved. Good economic conditions have paved the way for low mortgage rates. The same has also encouraged investors to take on loans from individuals with limited documentation.

Government-sponsored agencies that back loans are also taking an inclusive stance when it comes to self-employed borrowers. In July, Fannie Mae issued new guidelines that pertained specifically to self-employed income.

Combined, these create conditions favorable for business owners and freelancers to buy a house.

Are you ready for your first mortgage? To clue you in, here are the different phases you can (and should) go through.

Phase 1: Research

There’s no surefire way to get that home loan. However, there are things you can do to up your chances for approval. The right information makes for an empowered borrower, particularly one with your circumstances. These guide questions can help make research easier.

What loan options are there?

Being self-employed, standard loan products may not be applicable to you. Now that doesn’t have to be a drag because alternative loans come in varieties too. There’s the stated income loan that allows you to indicate your income on the application form, without the need to furnish tax records and paystubs. A bank statement loan allows income verification via the activity on your accounts, as indicated by your bank statements. Read up on the guidelines for these so-called ‘alternative loans’ so you’ll know where your borrower profile fits best.

»You could also ask the experts here.»

How do I go about in choosing a lender?

Knowing what loan products you can qualify for streamlines your search for a lender. Focus on the ones in your area that cater to the self-employed clientele. You can find them online or through recommendations from family, friends, or colleagues. Be sure to compare rates and fees.

Phase 2: Application

Phase two starts after you’ve selected a lender. Applications can be done in-person, online, or via telephone. It’s highly recommended that you go and fill out the form at the lender’s office. This way, you get to meet the loan officer and ask questions. Applying for a loan is an important step so you need to know exactly what you’re getting into.

On the form, you’ll be required to give information about your annual income, savings, debts, and employment history. Once completed, this is passed along to an underwriter.

Phase 3: Processing

The underwriter is the person responsible for reviewing your application, ensuring that you meet the requirements set forth by the bank or private lender. When needed, you may be requested to provide some type of documentation to substantiate the data on your application form.

Keep in mind that you could qualify for more than one loan type. Thus, it’s best to have all relevant documents ready in case they are needed. These include but are not limited to the following:

  • Federal income tax returns
  • Credit reports
  • Bank statements
  • Documents showing the viability of a business (if applicable)

If your application has passed the review after underwriting, it will then be issued a “Clear-to-Close”.

Phase 4: Closing

The legal transfer of ownership takes place during this phase. This is when you are required to pay for the down payment and other necessary fees that come with the purchase.

»Speak with a reputable lender today.»

Why Stated Income Loans Appeal to Investors and Big Earners

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There’s this popular notion that loans are a means for most people to afford something. Individually, they lack the financial capacity to pay for a ‘big ticket’ purchase in cash. For instance, a member of the working class doesn’t make millions in a year so he has to get a mortgage to buy that first house. Now, this might have been true in a decade ago. Today, there is a loan product that appeals to the really well-to-do. Introducing stated income loans, a unique way for the rich to expand or maintain wealth.

What Draws Big Earners to Stated Income Loans?

Most loan products out there require the borrower to provide detailed documentation of his/her income sources. A stated income loan is not as exacting. This feature appeals to big earners who either have trouble keeping track of their various income pools or would rather not disclose how much they actually make. The fact that this loan type does not require written verification of income and tax returns gives them a sense of security.
»Learn more about unconventional loans.»

Apart from having lesser restrictions, the guidelines of a stated income loan are more easily met by those in the upper classes. Without the need for extensive documentation, lenders need another way to reduce a borrower’s risk of default. The solution is to require excellent credit scores, plenty of cash reserves and a down payment that ranges from 35 to 50 percent. The average borrower, still in the process of clearing credit card debt, is not a candidate for this.

Finally, big earners and high profile investors aren’t looking for a 30-year loan term. They want something they can pay off in a short span of time. A tech mogul from Silicon Valley doesn’t want to pay for his new mansion in cash. He could use this particular loan to retain a portion of his own capital and use it for other investments.

The Options

Lenders are packaging stated income loans in a variety of ways to better serve the needs of a wealthy clientele. Some companies offer jumbo mortgages for borrowers with a 55 percent DTI. Others allow interest-only payments. These plans are especially attractive to high earners. Normally, they get the bulk of their income from those company bonuses or commissions handed out yearly or every quarter.This arrangement allows borrowers to make larger payments when they have more money. The rest of time they can make do with minimum payments.
»Get educated on non-qualified loans. Ask a lender today!»

Stated Income Loans: Know What You’re Getting Into

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Self-employed individuals usually find it difficult to qualify for a conventional loan because they lack the documentation necessary to jumpstart this particular process. Fortunately, many financial institutions are now offering alternative loan products that cater to this specific market.

The focus of this article’s discussion will be on stated income loans. As the name implies, they allow borrowers to simply state their monthly income on the loan application. Let’s take a closer look at what this actually entails.

Documentation Types

  • Stated income/verified asset loan (SIVA)

This allows a borrower to state his monthly gross income on the application form. Income verification is done by furnishing pertinent asset documents like bank statements.

  • Stated income/stated asset loan (SISA)

Allows the borrower to state both the monthly gross income as well as personal assets. In this case, providing supporting asset documentation will no longer be necessary.

With the loans above, the debt-to-income ratio will still be computed since income sources have been provided.

»Talk to the experts about your loan needs.»

Employment Verification

While furnishing paystubs and/or tax returns are not required, the lender will still subject the borrower’s application to an income verification process. His employer will be contacted to confirm that the applicant in question is indeed connected with the listed firm.

Meanwhile, self-employed borrowers will be asked to submit a CPA letter verifying the income of a self-employed client

Higher Interest Rates

If you’re approved for a stated income loan, you can expect to pay a much higher premium than you would for other loan types. This is because you’re putting more risk in the hands of the lender. The same goes for the subsequent buyer, should the loan be sold on the secondary market.

Interest rates for a stated income loan are also about 0.25 to 0.50 percent higher than conventional loans.

Eligibility

You are required to have excellent credit scores and plenty of cash reserves. Putting down a higher down payment is also expected.

“With us, a buyer has to put down at least 30 percent down instead of the regular 20 percent on a conventional loan. Many of our clients end up putting down 35-50 percent,” says Brian O’Shaughnessy, CEO of Athas Capital Group, based in Calabasas, California. “The loan also has maximum 70 loan-to-value ratio,” he adds.

The right lender can educate you further about the specifics of stated income loans.

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