Getting a loan with self employment income

[Justin Golden]

Good afternoon!

I just recently separated from the military and my wife and I will be moving to Washington, D.C.

I will be starting a business and my wife makes self employment income as well. Obviously this does not look good to a conventional lender, so I am looking for any advice on how to get home loans for properties. Any advice helps!

Thank you!

[Nick Belsky]

@Justin Golden

Bank Statement Loan all the way.  Rates will be higher than Conventional but they are a viable option.  50% of your business assets counting is crap, by the way.  Find another lender if you run into that.  Many will do 75% up to 100% based on the amount of ownership you and your wife have.  The ones that limit you to 50% are usually more expensive anyways.

These programs are Non-QM which means the lenders all have a different set of investors who fund them.  The guidelines are different and some are cumbersome to navigate.  Essentially, what you end up with a income based on regular, consistent deposits in your bank accounts.  Most lender won't allow the accounts to be mixed with personal and business, but some will.  Once they add up all the qualified deposits for 3, 6, 9, 12, 18, or 24 months (yes, they can be any of these increments - lesser is a higher rate!), they will usually apply an Expense Factor to your income to reduce it to a qualifying monthly income.  Some lenders will give you options; actual expenses as verified with a letter from a CPA or accountant, and automatically applied factor based on your business type (these can be anywhere from 10-60%), or you can provide a P&L or other financial statements to prove your actual expense ratio.  

Your DTI still comes into play as well. Most are 50% DTI, but will have other adjustments at higher DTIs. For example, the lender may require that you have 3 months of reserves available at 42% DTI, but if you go over 45%, then they may increase the reserve requirements to 6 months or even 12 months. The flip side is that some will even "reward" you for having a low DTI where they may not require reserves at all.

Assets come into play as well when qualifying.  You need to show you have sourced funds available as you would with conventional or agency loans.  Personal funds are usually counted at 100%, but as noted by others, if you are using funds in a business account, some lender will take another expense factor against you and only allow a percentage of the funds in your account to be used as down payment, closing costs, and even as reserves.  This is very frustrating to many as you get penalized twice with an "expense factor".  I find the better lenders will base the business allowance of funds equal to the amount of ownership the borrower has.  So if you are a sole member, your funds count at 100%.  If you are in a partnership and only own 25%, then you can only count 25% of the available balance in your business account.  Most borrowers I've encountered who are in partnerships are not trying to use business funds at all and are relying on personal funds.

A big thing to note here is that you DO NOT have to show your tax returns! If a lender asks for them, tell your broker to find another lender. Just like with conventional lending, tax returns can kill your qualifying income and make your DTI skyrocket. The whole reason bank statement loans exist for self employed borrowers is to avoid Tax Returns as documents required.

I love doing these loans and have helped many many SE borrowers purchase homes when they thought they'd have to either rent forever or pay cash for a home. Many programs will let you get in for as little at 10% down, but every now and then I will see a promo for 5% down. These work on second homes and investments as well, but usually 15% down on seconds and still the good ol' 20% down on investments. With DSCR loans, bank statement loans for investments just don't make sense anymore, but some still do them.

Cheers!