How to Get a Mortgage Loan If You’re Self-Employed With Fluctuating Income

home mortgage optionsEven with tighter regulations on property financing, folks with “normal” income from an employer can be approved for a home mortgage loan fairly easily. You simply have to prove that you have steady paychecks, a credit score of 640 or above, and enough money in the bank to cover your down payment.

However, if you’re a business owner or are self-employed, qualifying for property financing isn’t as simple. Regardless of your income, new federal regulations require self-employed individuals to jump through a number of hoops to obtain home loans, which means you may need to think outside the box to find the financing you need.

New Regulations for Qualified Financing

After the U.S. real estate bubble burst in 2008 – setting off a credit crisis and a devastating recession – the Federal Government took a look at mortgage lending practices and determined that something had to change. As a result of those changes, consumers immediately found it increasingly difficult to obtain home financing.

The regulations are still being rolled out. In 2014, the Consumer Financial Protection Bureau established standards for “qualified mortgages” as part of the Dodd-Frank lending reforms. According to the New York Times, these loans are often challenging to gain approval for if you don’t work a conventional job.

However, the market is dominated by them. They are considered by the government to be solid and fair for both consumers and lenders alike. And, furthermore, mortgage companies are highly motivated to offer them, since doing so protects them from legal recourse should a loan go bad.

In order to get a qualified mortgage, you’re required to have the following:

  • Income Verification. It’s not enough to have a padded bank account – you need to prove that you have a steady stream of income. If you are paid sporadically but in large chunks, these paychecks are typically averaged out over the course of two years to give lenders a good idea of your monthly take-home.
  • Debt-to-Income Ratio. Your debt-to-income ratio cannot exceed 43%. For the purposes of mortgage qualification, this figure is calculated by dividing your recurring monthly debt by your recurring average monthly income. Of course, this is problematic if you’ve taken out loans to start or support your business.
  • Two Years of Personal and Business Tax Returns for the Self-Employed. Unfortunately, tax write-offs may come back to take a giant chunk out of your qualifying income when all is said and done, which is why lenders want to review your full returns. For instance, let’s say your self-employment income was $75,000 per year for the past two years, but your business write-offs were $50,000 each year. Lenders look at this as a yearly income of $25,000 – which would make it difficult to qualify for much of anything.
  • Analysis of Income Trends. Be prepared to explain dips in income. Even if your income looks good when averaged over two years, you have to explain any declining trends prior to qualifying.
  • Additional Financial Assets and History. Mortgage companies often want you to have a credit score of at least 640 to qualify for an FHA loan (a loan insured by the Federal Housing Authority), but your score needs to be closer to 700 for a conventional loan. The total down payment required ranges from about 3% to 20% of the price of the home, depending on the mortgage product (FHA loans usually require a smaller down payment than conventional loans). High down payments can be very challenging to come by if you’ve invested your liquid assets in your business.

All of these requirements can make it much more challenging to find financing if you’re self-employed or a business owner, even if you’re great with money and have significant savings.

home mortgage options

Alternatives to Traditional Property Financing

Even if it seems like you’d never be able to own your own property due to the new regulations for qualified loans, all is not lost. Other options may make it possible for you to find home financing.

1. Assistance From Family Members

While certainly not an option for everyone, some self-employed individuals rely on family members for home loans. Let’s say you’ve been self-employed for a year and earn a good income but cannot secure a qualified mortgage product because you don’t have two years of stable income. In this situation, family members with solid income (and a hefty streak of generosity) may be willing to co-sign your loan. The property belongs to you and you make payments on the mortgage, but your family members guarantee the loan.

Some mortgage companies even allow you to refinance the property into your name once you have your required two years of proof. Of course, this option can prove problematic for family dynamics if your business goes south or you default on the loan, so broach it cautiously.

2. Seller Financing

Sellers who own their property outright may choose to offer financing on their own either because the market is weak (they can’t find a buyer), or they’re interested in producing an income stream from their investment. The terms of a loan are written into a promissory note, and your monthly payments go directly to the seller.

These arrangements usually have a higher interest rate than bank loans, but they can cut overall costs by eliminating mortgage origination fees and other lending fees. You do need to be prepared to explain to the seller why you’re a trustworthy candidate when you weren’t a strong enough candidate for a traditional bank loan. In these instances, a sizable down payment, large bank account, and strong revenue streams can do the talking for you.

3. Rent-to-Own

A rent-to-own property can be a good option if you’re waiting for your two years of income proof before obtaining a qualified mortgage product. In these agreements, you enter into a lease and pay rent just like you would for any rental property. However, the rent is typically a little higher than market value, and this “extra” goes toward building a down payment which you can use at the end of the lease term to purchase the property. If you choose not to buy the house at the end of your lease, this surplus usually stays with the landlord.

The benefit of this option is to save up your down payment for a one- or two-year period, build your business, pad your income, and deal with any other issues that might block you from a qualified mortgage product, such as bad credit.

4. Investment Accounts or Insurance Policies

If you’ve got retirement accounts or insurance policies, you may be able to borrow against them. However, all of the following options require you to either build your retirement account or cash value insurance policy back to its previous size if you don’t want to shortchange the benefits they’re meant to offer. Also, remember that you lose out on earnings when your retirement money is used for a home rather than allowed to grow in your accounts.

Life Insurance
If you own a cash-value life insurance policy, such as a whole life or universal life policy, it’s possible to borrow against its cash value. As you pay into the policy over time, the cash value builds as it earns dividends and interest. You probably won’t even have to answer any questions about taking out a loan, but you do need a plan to pay it back (as you would with any loan).

Furthermore, you need to think long and hard about the risks associated with borrowing from a life insurance policy, particularly if the unthinkable happens and your family is left with a lower payout because the cash value is tied up in a loan. Rules vary based on the policy you own, so talk to your insurance company before making any decisions.

IRA
At any time, you can withdraw your contributions from a Roth IRA without taxes or penalty. (If you’re older than 59 1/2 years of age, you can withdraw funds tax- and penalty-free for any purpose.) However, even if you’re younger than 59 1/2 and contributed less than $10,000 to your Roth, you can withdraw up to $10,000 without tax or penalty to use toward the purchase, repair, or remodel of a first home.

To be considered a first-time homebuyer, you must not have owned a home for the past two years. Any earnings withdrawn must be used within 120 days, and those earnings must have been in the account for at least five years to avoid both an early withdrawal penalty of 10% and income taxes on the withdrawal. If earnings have been in the account for fewer than five years, you won’t be assessed the 10% penalty, but you do need to pay ordinary income tax.

You can also withdraw up to $10,000 from a traditional IRA, including SEP-IRAs, and avoid the 10% penalty if the money is used for the same purpose and is spent within 120 days. (If you’re older than 59 1/2, you can withdraw IRA funds for any purpose without penalty.) However, you do have to pay income tax on the withdrawal.

Furthermore, the $10,000 early withdrawal allowance is a lifetime limit on withdrawals from any IRA – including the Roth IRA – for buying (and repairing or remodeling) a first home. In other words, the sum of withdrawals from any combination of IRA accounts cannot exceed $10,000.

401k
While you can borrow against your 401k, it’s a risky option. Unlike withdrawing funds from your 401k – which is a bad idea unless done so in utter desperation – a loan against your 401k can get you cash up to half of your account value, with a maximum of $50,000.

For instance, if your account value is $50,000, you can only borrow $25,000 for a down payment. You do pay interest – but it’s paid back to yourself. However, the interest rate is variable – based on the prime rate – which could be a problem if prime spikes above its current level of 3.25%. Since a 401k loan term is typically five years (but some are up to 15 years) you need to be sure you can afford the monthly payments for the duration. Additionally, if you lose your job, you have as few as 60 days to repay the loan – otherwise, the unpaid amount may be taxed as ordinary income and assessed a 10% early withdrawal penalty if you’re under 59 1/2 years old.

5. Shop Around for Non-qualified Mortgage Products

It is possible to find lenders willing to think outside the “qualified mortgage” box if you demonstrate that you’re a low-risk candidate. Unqualified mortgage products include no-documentation loans, interest-only loans, and payment option loans.

For instance, say that your business loans have pushed you over the debt-to-income ratio for a qualified mortgage. If you have a 40% down payment, a great credit score, and several years of solid income, you can likely find a lender. However, because of the lender’s legal and financial risks associated with unqualified products, you typically pay a higher interest rate for this kind of product.

home mortgage options

Final Word

Just because you followed your dream to own a business doesn’t mean you have to abandon your dream of owning a home. Even if you have to wait two years to adequately prove your income, the time you invest in making yourself a good candidate for a loan could end up paying significant dividends. Use your time to set aside money for a larger down payment and boost your credit score so you can qualify for the best product out there when it’s time to buy.

What additional options can you suggest to find financing for a home while maintaining a self-employed status?

  • susan596

    my Aunty Julia got silver Volkswagen Beetle Convertible by
    working parttime off of a home computer… Look At This F­i­s­c­a­l­P­o­s­t­.­?­o­m

  • http://www.trendycheapo.com/ Taylor

    Love this post! My dream to own a small business surpasses my need for a house currently, but it’s an important thing to consider. I really like the rent-to-own option because it gives me enough time to establish myself while paying towards ownership. Definitely something I’ll give more thought!

  • Malissa Delh

    Hello, I am Malissa Delh, currently living in New jersey city, USA. I am a widow at the moment with three kids and i was stuck in a financial situation in April 2014 and i needed to refinance and pay my bills. I tried seeking loans from various loan firms both private and corporate but never with success, and most banks declined my credit. But as God would have it, I was introduced to a Man of God a private loan lender who gave me a loan of $85,000USD and today am a business owner and my kids are doing well at the moment, if you must contact any firm with reference to securing a loan without collateral , no credit check, no co signer with just 2% interest rate and better repayment plans and schedule, please contact Mr James Lewis. He doesn’t know that am doing this but am so happy now and i decided to let people know more about him and also i want God to bless him more.You can contact him through his email: [email protected]

  • http://www.military.com/spouse/military-deployment/reintegration/returning-to-home-life-after-deployment.html amazing testimony

    How To Get Your Lover Back After Separation?

    My Name is Vicky Lorimer, I am From Manchester in United Kingdom.i am hear to give testimony of how i got back my husband, we got married for more than 9 years and have gotten two kids. thing were going well with us and we are always happy. until one day my husband started to behave in a way i could not understand, i was very confused by the way he treat me and the kids. later that month he did not come home again and he called me that he want a divorce, i asked him what have i done wrong to deserve this from him, all he was saying is that he want a divorce that he hate me and do not want to see me again in his life, i was mad and also frustrated do not know what to do,i was sick for more than 2 weeks because of the divorce. i love him so much he was everything to me without him my life is incomplete. i told my sister and she told me to contact a spell caster, i never believe in all this spell casting of a thing. i just want to try if something will come out of it. i contacted Dr Brave for the return of my husband to me, they told me that my husband have been taken by another woman, that she cast a spell on him that is why he hate me and also want us to divorce. then they told me that they have to cast a spell on him that will make him return to me and the kids, they casted the spell and after a week my husband called me and he told me that i should forgive him, he started to apologize on phone and said that he still love me that he did not know what happen to him that he left me. it was the spell that Dr Brave casted on him that make him to come back to me today,me and my family are now happy again today. thank you Dr Brave for what you have done for me i would have been nothing today if not for your great spell. i want you my friends who are passing through all this kind of love problem of getting back their husband, wife , or ex boyfriend and girlfriend to contact [email protected]. and you will see that your problem will be solved without any delay.

  • Tatiana

    I currently own my home and do not have a mortgage. Because of a recent divorce, I will need to get a loan to buy my ex out, or sell to pay him off. To complicate things, I have been self employed for the past 13 months. The current value of my home is around $500,000+ and I would prefer not to sell and have to move my family. Is there any consideration for my situation since I do not have the 2 full years of tax returns? My credit score is above 700 and my debt to income ratio is good. Any advice is appreciated.

    • Sid Jack 20

      Yes. Freddie Mac loans only require an examination of 1 years returns. You will also need to show P/L statements for the current period to show you are still profitable. In my experience, Freddie Mac backed loans have a slightly higher interest rate (almost negligible) but that is the only downside. I have also heard rumors that they will also begin taking into account assets to improve application strength, not just for the purpose of reserves. Contact me on Facebook for more details: Sidney Jackson.

  • Mrs Jennifer Anderson

    Hello everyone, My name is Mrs Jennifer Anderson and i am talking as the happiest person in the whole wild world today and i told my self that any lender that rescue my family from our poor situation, i will tell the name to the whole wild world and i am so happy to say that my family is back for good because i was in need a loan of $ 100,000 USD to start my life all over as i am a single mum with 4 kids and the whole world seemed like it was hanging on me until i met the GOD sent loan lender that changed my life and that of my family, a GOD fearing lender, Mr Richy Walters, he was the saviour GOD sent to rescue my family and at first i thought it was not going to be possible until i received my loan of $ 100,000 USD and i will advise any one who is in genuine need of a loan to contact Mr.Richy Walters via email at. [email protected] because he is the most understanding and kind hearted lender.

  • clarisa steve

    Hello i am Clarisa Steve from Florida USA,when i was in need of a loan of

    $230,000 to transit a business my friend introduced Mark Oscar loan firm to me because she got a loan from them sometime ago, so I was so scared because of the scams in the internet but my friend encouraged me to give them a try and i gave them a try and i got my loan within 4hrs and their ways was very easy no credit check,no cosigner,no collateral and their interest rate is just 2%, so i will advice anyone out there that need a loan to contact them via their Email:([email protected]).

  • Miguel

    Tatiana, a small local bank/credit union may consider your scenario if they have portfolio loans, meaning they will lend you the money with intentions to keep your loan until maturity. The 24 month for self employment requirement is something a lender cannot overlook if they plan to sell your loan in the secondary market. I don’t know what state you are in, but there might be private money lenders that will do it. You will pay a higher interest but you will pay the ex off and then refinance once you have the required documented income history. Before looking at the private money option, make sure to talk with a loan officer about the income you will need to show on your tax returns to qualify for a refinance.

  • Mr Wood Barry

    Hello Dear Sir/Madam.

    I am Mr. Wood Barry, a private money lender. I give out loans with an interest rate of 3% per annual and within the amount of $1000.00 to $500,000,000.00 as the loan offer. 100% Project Funding with secured and unsecured loans are available. We are guaranteed in giving out financial services to our numerous clients all over the world. With our flexible lending packages, loans can be processed and funds transferred to the borrower within the shortest time possible. We operate under clear and understandable terms and we offer loans of all kinds to interested clients, firms, companies, and all kinds of business organizations, private individuals and real estate investors. Just complete the form below and get back to us as we expect your swift and immediate response. EMAIL : [email protected]

    Attention!!!

    Do you have a bad credit?
    Do you need money to pay bills?
    Do you need to start up a new business?
    Do you have unfinished project at hand due to bad financing?
    Do you need money to invest in some area of specialization which will profit you? and you don’t know what to do.

    We offer the following loans below,
    personal loans[secure and unsecured]
    business loans[secure and unsecured]
    combination loans
    students loans
    consolidation loans and so many others.

    1. Full Names:……………………….
    2. Contact Address:…………………..
    3. Loan Amount Needed:………………..
    4. Duration of the Loan……………….
    5. Direct Telephone Number:……………….

    Email [email protected]

    Best Regards,

    Mr Wood Barry

  • Pasqualina Lattanzio

    I will like to ask this question before i go straight to my public announcement out here. If getting a legit loan online was so easy as stated in all this fabricated / duplicated loan testimonies that i have been reading through online, then why was i and my lovely husband turned down for a loan online five times after been scammed of about $42000 Australian Dollars? We the loan seekers are the common regular victims of this fake loan stories simply because we are in dire needs we believe in their stories out of desperation and sometimes frustrations to get a loan, but at the end of it all we find out that we have gained nothing but rather loosed the little we have into the hands of this online scammers who claim to be real and reliable loan lenders. The last loan lenders that ripped us off our hard earned money asked us to pay some few amount worth $800 dollars for insurance because they said that we were on high risk. How is that? I still don’t understand. how can a lender be requesting several fees from a borrower? if that borrower was having money would he or she have come along to ask for a loan? those lenders deceived my husband and i of getting a loan and we thought it was all real because we never believed that there was anything as an online loan scam and they had us pay all we had to them and due to the way things were moving we had to close out our business over here in Australia as we could not meet up with the customers needs any longer because we sold all most every single thing we had and we could not replace them as we thought that we could do so if we get our requested loan amount. In a lay man language, YES !! we were scammed by almost six different lenders online, Before a customer who was a closed friend to my family saw the way things were so bad for us and decided to introduce us to a private loan company that was registered and accredited by the government.But frankly speak-en, we refused any further loan offer because we had concluded that all of them were scams and the same but he insisted as he opened up to me and my husband how he got a loan from the loan firm he narrated to us that he has so much and high integrity in granting loans to the world. He also told us that this loan firm called Derek Barlow Loan company is a reliable and a reputable loan firm know in the world for reliable work. After this our family friend called Marin Car has told us so much about this loan firm, I and my lovely husband had no other option than to believe him, because we knew him from the onset to be a man of unquestionable characters who was always known for his words and we applied with this company that he called Derek Barlow Loan Firm but prior to our application with this email address: [email protected] , that he provided to us to contact the reliable loan firm, Without fear that we are applying for a loan from a firm that will not scam us out of our hard earned money like others. It was to my own satisfaction and i applied but God was so kind that he lead us through and we got our loan after meeting with the terms and conditions this loan firm and we follow up with the non-collateral loan process and meet up with the requirement in getting our loan. Am by name Lattenzio Pasqualina and you can send me an email on the following email address: which is my private email address if you need more clarification. Because i am ready to do all that is within my reach to let the whole world know that Derek Barlow Loans is the only real and existing loan firm online that can grant you loan without any form of scam activities. You will also find my identity card on some of my post to let everyone that need loan know that Derek Barlow Loan is the only real and reliable loan firm online in the world that could grant us our dream loan amount of $456000 Australian Dollars.

  • Jessica Taylor

    (welcome to bizloanslender)

    Are you searching for a very genuine loan lender at an affordable interest rate?
    Processed within 2 to 3 working days.Have you been defrauded by some fraudulent lenders,
    Have you been turned down constantly?
    by your Banks and other financial institutions? The good news is here!!!
    We offer loans ranging from $5,000.00 to $5,000,000.00 Max. at 2.5%
    Interest rate per annual.Loans for developing business a competitive
    Edge/business expansion. We are certified, trustworthy, reliable,
    Efficient, Fast and dynamic. email us now via:
    ([email protected]) and a co-operate financier
    For real estate and any kinds of business financing.
    we give out long term loans for one year to twenty years maximum.
    We offer the following kinds of loans and many more;
    * Personal Loans (Unsecured Loan)
    * Business Loans (Unsecured Loan)
    * Consolidation Loan
    * Combination Loan
    * Home Improvement.
    Please if you are delighted and interested in our financial offer please contact bizloanslender.
    ([email protected])….

  • Amtullahkumar