How to get a mortgage loan if you are self-employed with fluctuating income

Even with stricter real estate financing rules, people with “normal” income from an employer can be approved for a mortgage loan quite easily. All you have to do is prove that you have a fixed salary, a credit score of 640 or higher, and enough money in the bank to cover your down payment.

However, if you are a business owner or work as a self-employed person, qualification for real estate financing is not that simple. Regardless of your income, new federal rules require that self-employed people jump through a number of hoops to get home loans, which means that you may have to think outside the box to find the financing you need.

New Regulations for Qualified Financing

New Regulations for Qualified Financing

After the US real estate bubble burst in 2008 – causing a credit crisis and a devastating recession – the federal government looked at mortgage loans and determined that something had to change. As a result of these changes, consumers immediately noticed that it was becoming increasingly difficult to get financing at home.

The regulations are still being rolled out. In 2014, the Consumer Protection Agency established the standards for “qualified mortgages” as part of the Dodd Frank loan reforms. According to the New York Times, these loans are often a challenge to get approval if you don’t have a conventional job.

However, they dominate the market. They are considered by the government to be solid and fair to both consumers and donors. Moreover, mortgage companies are highly motivated to offer them because they are protected against legal means if a loan were to be bad.

To get a qualified mortgage, you must have the following:

  • Income verification. Having a bank account is not enough – you have to prove that you have a steady stream of income. If you are sporadically paid, but in large parts, these fees are generally averaged over two years to give lenders a good idea of ​​your monthly take-home.
  • Debt-to-income ratio. Your debt-to-income ratio may not exceed 43%. For mortgage qualification, this figure is calculated by dividing your recurring monthly debt by your recurring average monthly income. This is of course problematic if you have taken out loans to start or support your business.
  • Two-year tax return for individuals and businesses for the self-employed. Unfortunately, tax deductions can come back to take a huge portion of your eligible income once everything has been said and done, so lenders want to see your full return. Suppose your income from self-employed activities in the last two years was $ 75,000 a year, but your depreciation was $ 50,000 a year. Lenders consider this an annual income of $ 25,000 – which would make it difficult to qualify for much of anything.
  • Analysis of income Trends. Be prepared to declare dips in income. Even if your income looks good on average after two years, you have to explain any falling trends prior to qualification.
  • Additional financial assets and history. Mortgage companies often want you to have a credit score of at least 640 to be eligible for an FHA loan (a loan insured by the Federal Housing Authority), but your score must be closer to 700 for a conventional loan. The total down payment varies from about 3% to 20% of the price of the house, depending on the mortgage product (FHA loans usually require a lower down payment than conventional loans). High down payments can be very challenging if you have invested your cash in your company.

All of these requirements can make it a lot harder to find financing if you are self-employed or a business owner, even if you are good at handling money and making significant savings.

Alternatives to traditional real estate financing

Alternatives to traditional real estate financing

Even if it seems like you would never be able to own your own property because of the new rules for qualified loans, everything is not lost. Other options can make it possible to find financing at home.

1. Help from family members

1. Help from family members

Although certainly not an option for everyone, some self-employed people rely on family members for home loans. Let’s say you have been self-employed for a year and earn a good income, but you cannot get a qualified mortgage product because you do not have a stable income for two years. In this situation, family members with a fixed income (and a good deal of generosity) may be willing to sign your loan. The property is yours and you pay the mortgage, but your family members guarantee the loan.

Some mortgage lenders even allow you to refinance the ownership in your name once you have your required two-year proof. Of course, this option can be problematic for family dynamics if your business goes south or if you don’t get the loan as standard, so discuss it carefully.

2. Seller financing

2. Seller financing

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

These schemes usually have a higher interest rate than bank loans, but they can reduce the total cost by eliminating mortgage production levies and other loan rates. You must be prepared to explain to the seller why you are a reliable candidate if you were not strong enough for a traditional bank loan. In these cases, a substantial deposit, a large bank account and strong income streams can speak for you.

3. Rent-to-own

3. Rent-to-own

Renting a house can be a good option if you are waiting for your two-year income statement before you have purchased a qualified mortgage product. In these agreements you conclude a lease agreement and you pay rent as you would for each home. However, the rental price is usually slightly higher than the market value, and this “extra” goes to building a down payment that you can use to purchase the property at the end of the lease term. If you choose not to buy the house at the end of your lease, this surplus usually remains with the landlord.

The advantage of this option is to save your down payment for a period of one or two years, build your business, cover your income and handle other problems that can block you from a qualified mortgage product, such as bad credit.

4. Investment accounts or insurance policies

4. Investment accounts or insurance policies

If you have pension accounts or insurance policies, you may be able to borrow against them. However, all of the options below require that you can rebuild your pension or cash value insurance policy to the previous size if you do not want the benefits they are intended to be shortened. Also, remember that you miss out on income when your pension is used for a house instead of growing in your accounts.

Life insurance
If you have a life insurance policy with a monetary value, such as a lifelong or a universal life policy, it is possible to borrow at cash value. While you pay for the policy over time, the cash value builds up because it earns dividends and interest. You probably don’t even have to answer top questions about taking out a loan, but you must have a plan to pay it back (as with any loan).

You also need to think long and hard about the risks associated with borrowing a life insurance policy, especially if the unthinkable happens and your family has a lower payout because the cash value is secured in a loan. Rules vary based on the policies you own, so talk to your insurance company before making decisions.

For example, if your account is $ 50,000, you can only borrow $ 25,000 for a down payment. You do pay interest, but it is repaid to yourself. However, the interest rate is variable – based on the prime rate – which could be a problem if prime peaks exceed the current level of 3.25%. Since a 401,000-day duration is usually five years (but some are up to 15 years), you must be sure that you can pay the monthly payments for the duration. In addition, if you lose your job, you only have 60 days to repay the loan – otherwise the unpaid amount can be taxed as normal income and a 10% early penalty will be calculated if you are under 59 1/2 years old.

5. Shopping for non-qualified mortgage products

5. Shopping for non-qualified mortgage products

It is possible to find lenders willing to think outside the “qualified mortgage” box if you prove that you are a low-risk candidate. Non-qualified mortgage products do not include documentation loans, interest-free loans, and loans with payment options.

For example, suppose 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 high credit score and several years of solid income, you can probably find a lender. However, due to the lender’s legal and financial risks associated with non-qualified products, you usually pay a higher interest rate for this type of product.