WE MAKE HOME HAPPEN, FOR THE SELF-EMPLOYED!
Good news to all the self-employed and the variable income home loan applicants!
As of 2023, the lenders will no longer request your 2020 Income documentation as long as you can provide 2022 income documentation.
This is fabulous news for many of my clients.
Several of our clients worked in businesses in 2020 that took a substantial financial hit due to the Covid-19 Pandemic and “shelter-in-place” that occurred in 2020.
Now comes 2023, the home loan applicant will no longer be required to include the 2020 income history; if the applicant can provide the latest and most recent 2022 tax return or proof of income.
What does this really mean? In 2023, the lenders will accept 2022 tax returns, or verifications of income, and 2021 tax returns and verification of income and therefore the 2020 income history is no longer be necessary. Ultimately, what this really means, for most self-employed and variable income employees, is a higher income calculation and therefore a higher loan amount approval for these applicants come 2023.
In 2020 many businesses and their workers made significantly less income and that minimal income will no longer be calculated and averaged by the lender to determine the monthly income used for qualifying for a home loan.
Needless to say, many home buyers that were self-employed or had variable income that required 24-month history got caught in this conundrum. They made good income except during that pandemic gap. Just when the interest rates dropped to record low rates, which spurred a refinance boom, the lenders factored in the pandemic gap in income and employment and lower profits for their calculations of approved loan amounts. Was this fair? Not really.
The issue remained, if it happened once, it could happen again, and risk managers were being diligent to protect the interest of the investors.
Many of these applicants qualified, yet, for much less than what they applied for and were unable to buy the home they were seeking to purchase or the opportunity to seize the moment to pay off their debts with the historic low mortgage rates offered through-out the Covid-19 pandemic.
Our advice today to all self-employed and variable income borrower is to file your tax returns as soon as possible for 2022.
For the self-employed or variable income applicants, when applying for a home loan, additional documentation and tax returns is typical and expected. A full time hourly or full-time salary employee with no variable income typically is not expected to provide tax returns, as long as they have W-2’s. A self-employed home loan applicant applying for a conventional loan is expected to provide two years of tax returns both individual and business returns.
Good Friend Mortgage is happy to provide guidance and consultation to self-employed and variable income employees, it’s one of areas of expertise that differentiates us from the competition.
With non-conventional loans and non-government loans, meaning non-Fannie Mae, non-Freddie Mac, non-FHA, non-VA, and non-USDA; basically, termed as non-conforming loans, the self-employed applicant has the option to eliminate the IRS as a third-party verification system to qualify.
The fact is, the IRS, believe it or not, calculates income more creatively than a lender cares to deal with. A lender just needs to make sure there is income available for the ability to pay back the mortgage. The lender must apply the net income determined on the tax return.
A good example of the creative cost is; office cost and maintenance, commuting cost and maintenance, insurance, to name a few of many costs that are deductible yet many of these costs are certainly not all or nothing expenses and are definitely cost that the conventional lenders figure are absorbed and factored into the remaining qualifying income ratio used for conventional loans for basic monthly budgetary needs (other than debts).
The W-2 employee does not have to show their tax return just their gross W-2 and the approval ratio allows up to typically 45% (can be more, can be less) for total debt and housing cost and the remaining 55% of the income is for taxes, healthcare, food, gas, maintenance, clothing, cell phones. Right away, I see the cell phone is a cost the self-employed borrower is not calculating in the remaining 55%, nor the gas or maintenance, this is right away reflected in the IRS creative breakdown of cost prior to net income. So, the self-employed borrower’s income used to calculate the 45% ratio required has already experience a haircut in the 45% ratio for cost the remaining 55% ratio is expected to cover. Yes, the conventional lender does not change ratios for self-employed and therefore many self-employed borrowers may choose an alternative approach with a non-conforming lender.
Options exist that may be more suitable for a self-employed borrower seeking to qualify for a home loan without displaying their tax returns. Many non-conforming lenders will accept the deposits on 12 months of personal bank statements to determine the monthly income for a self-employed applicant in lieu of tax returns.
Good Friend Mortgage is in the business of helping self-employed borrowers discern the best loan available specific to their needs.
Now, in 2022, is a good time to plane for 2023, especially if you are self-employed and want to move forward and consider applying for a home loan in 2023. It’s nice to know that the income details for 2020 from the pandemic can be put to rest for many self-employed borrowers.
Our Mortgage Consultants are ready to answer your questions and help guide you through the process