Are Self Employed Mortgages Making a Comeback?
Let’s face it, the only difference between a standard, traditional loan and a “self employed” home loan is how you document your qualifying income.
Most self employed people will do absolutely anything and everything to reduce your taxable income.
This is great when it comes to paying the IRS, but bad when it comes to proving that you make a living. I know what you’re saying right now…”but wait – can’t you see that I make a lot of money before write offs?!”
Well, yes, an underwriter can see that. They can also see that the cost of running your business eats up most of your gross income.
Unfortunately, we are now all members of the bad apple club, and have been adversely affected by the “less honest” amongst us self employed tax payers, and the ability to “state our income” is a thing of the past.
This doesn’t mean that there are no home loan programs for the self employed, it simply means that we have to document our income in a different way.
Until more reasonable home loan options come back, we must be grateful for what options we do have for documenting qualifying income.
Self Employed Home Loans
If you were self employed in the past, and used one of these stated income, or no-income / no-asset loans to qualify, you may remember the interest rate and fees associated with that loan.
Reduced documentation loans have always been more expensive than full documentation, W2 income loans.
This isn’t always an issue with self employed types because higher interest rates means a bigger write off.
The bigger issue up to this point has been availability, not cost.
Being self employed, we know that sometimes we don’t fit into traditional boxes for borrowing money. We are used to taking on additional risk and sometimes paying a higher premium for the financial freedom, and other tax benefits we enjoy.
If you’ve been research on your own, you may have heard of portfolio loans as a potential option. In some cases, these are a few degrees above a hard money loan.
Recently, I am seeing more aggressively priced and structured loan programs become available for self employed borrowers that I would relate more to the “Alt-A” loans of 10+ years ago.
These are not quite as low of interest rates and fees as a FHA or Conventional loan, but they also will not make you fall out of your chair when you look at the price tag.
I’ve personally done several of these loans recently and I think we are getting really close to responsible and affordable loan programs for the self employed.
That said, let’s look at a couple of self employed home loan options that are available now.
Bank Statement Loans
Bank statement loans will allow a self employed borrower to use bank statement deposits as qualifying income. I have seen lenders allow either personal, or business bank statements to be used.
Depending on the specific guidelines of the lender, a portion of your deposits can be used as qualifying income.
As an example of how this works, I have done one of these bank statement programs for a self employed home buyer that files a Schedule C on their 1040 Federal taxes.
In this case, we were able to use 100% of business related deposits into their personal bank account. These deposits were averaged over 24 months.
Note that deposits that are not directly business related will be excluded from this calculation.
When using business statements, you are probably going to be using 50% of deposits, and I have one investor that is using a 12 month average instead of the 2 years.
Expect to also provide a profit and loss statement, prepared by you, to show what your operating expenses have been for the most recent year.
The income on the profit and loss statement must match your revenue on the profit and loss statement. That’s the biggest challenge I’ve seen when using this program.
The terms on these types of loans are typically Hybrid ARM (adjustable rate mortgage) loans that are fixed for the first 5 or 7 years, then turn adjustable after that. You can almost always get a 30 year fixed loan as well at a premium rate.
It is also not uncommon for there to be an interest only option available on the Hybrid ARM during the fixed period.
Real Estate Investor Cash Flow Loans
If you are self employed, and own investment properties, this is a great option for accessing equity to do upgrades on the property, or get the payments down on an adjusting or fully amortizing loan that you may have on the home now.
These loans use the cash flow from either rents, or a rental survey performed by a real estate appraiser to determine the income for the property.
For the investor that I have used for this product, we are able to use 85% of the rental agreements, which needs to 100% service the new mortgage debt.
In my scenario, 85% of the rents of a 3 unit property account for about 160% of the new mortgage payment after taking out a bunch of cash for upgrades to the property.
We are refinance a loan that after 10 years of interest only payments, is adjusting, and fully amortizing into a 20 year term.
This investor made BANK during the downfall with interest only payments at an incredibly low adjustable rate. Even though the new loan is at a much higher interest rate than we have now, with an interest only payment and a 30 year amortization, we’re able to do the upgrades, and fix the payments for the next 5 years and still cash flow the property in the black.
Understanding the Costs
The interest rates are definitely higher using these types of loan programs. While the fees may appear higher when using one of these loans, in reality, they are not necessarily more expensive.
The sticker shock will come in when you see the origination fees. When using traditional financing, the investor is typically paying the loan officer for placing the mortgage with them.
These alternative documentation loans may allow this type of loan officer compensation, but I am telling you now that it is going to be less expensive in the long run to pay the lender their compensation as a closing cost.
The alternative to you, the borrower, paying the loan officer is for the rate to be increased, in which case the lender would pay the loan officer.
The interest rates on these programs will already run up to 1% or more higher than a traditional conventional loan.
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