Borrowers who are self-employed
If you’re a self-employed borrower, you may be asked to supply additional documentation to demonstrate a two-year history of steady income and work. A profit and loss statement, a business license, a signed declaration from your accountant, federal tax returns, balance sheets, and bank accounts for the past years are some of the documentation that may be requested (the exact amount of time depends on the lender).
Many times, self-employed people need to show tax returns from the last two years, as well as any necessary schedules.
borrower’s income stability, the location and nature of the borrower’s business, demand for the product or service offered by the business, the financial strength of the business, and the ability of the business to continue generating and distributing sufficient income to enable the borrower to make the mortgage payments are all factors that go into approving a mortgage for a self-employed borrower.
If you can’t get a typical mortgage because of your situation, there are two options for self-employed people.
1. Mortgage with a specified income or a specified asset
This type of mortgage is based on the income you report to the lender without having it verified in any way. Because lenders will verify the sources of your income rather than the actual amount, stated income loans are also known as low-documentation loans.
Self-employed individuals should have a list of recent clients and any additional sources of cash flow, such as income-producing investments, on hand. A copy of Internal Revenue Service (IRS) Form 4506 or 8821 may also be requested by the bank.
Form 4506 is used to request a copy of your tax return from the IRS directly, which prevents you from submitting forged returns to the lender. It costs $43 per return, but you might be able to get it for free if you request it in advance. 1213 Form 4506-TForm 8821 permits your lender to go to an IRS office for free and examine the forms you provide for the years you specify. 14
2. Loan with No Documentation
The lender will not check any of your income details with this type of loan, which could be a viable option if your tax returns reveal a business loss or a very modest profit. Expect your mortgage interest rate to be higher for a no-documentation loan than for a full-documentation loan since it is riskier for the bank to lend money to someone with an unverified income.
Interest rate: Alt-A mortgages are low- and no-documentation loans with interest rates that fall between prime and subprime.