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Updated almost 6 years ago,

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Chris Mason
Pro Member
  • Lender
  • California
10,782
Votes |
9,930
Posts

PSA: Self employed generally now require ONE year of tax returns.

Chris Mason
Pro Member
  • Lender
  • California
ModeratorPosted

I'd say that over 60% of the time, the "automated underwriting system" (AUS) only calls for one year of tax returns for self employed persons. Not the two years you read about on google search results from 2+ years ago. It must still be a 2+ year old business, but only one year of tax returns will be used to calculate income.

Real life typical example we see, that I in fact saw just today:

  • You start your plumbing business in January of 2017.
  • Your first five star Yelp! review is in March 2017.
  • It is currently April 2019. Time-adjust this post as needed, I'm around if you have other questions about the latest and greatest of AUS requirements Mrs. Smith who is reading this from Google 3 years in the future.
  • You have a 684 FICO.
  • Your 2017 taxes for the brand new business show little income. You were just getting started, had little revenue in 2017, and MASSIVE expenses! You called 15 different mortgage lenders and they all brushed you off in 2018. They all said "we need two years!" OR they quoted you some "non-qm" 7% interest rate for a "bank statement" program, and that turned you off.
  • Your 2018 was very good for business, and you recently filed those returns. The IRS has processed them.
  • You called me before filing your 2018 taxes, so I told you to "depreciate" ANYTHING your CPA says you can lawfully depreciate according to the tax code.
  • A "two year average" of 2017/2018 tax returns would say that you are as broke as a joke and can't get a mortgage. However...
  • Your 2018 returns show $40k in "depreciation," representing capital expenses that the IRS says you can depreciate over several years. This means your mortgage-qualifying income is $40k higher than your taxable income. And we did some other stuff too. And, again, your business really took off in 2018!
  • Underwriter will condition for the most recent (2018) year of tax returns and proof your business is 2+ years old. Your CPA says (NSFW!) "f off, I'm not writing a 'CPA letter' because my liability insurance policy will be cancelled if that lender sues me!" We use the Yelp! review to demonstrate that your business is 2+ years old and thank the CPA for their time (CPAs: I'm all about the Yelp! reviews and will not ping you in general if we have that or similar).
  • SUPER EXTRA BONUS HINT: You already moved those down payment funds from your "business" checking account into your "personal" checking account 3+ months ago, so I'm not going to have to ask your CPA to write a letter "promising" that the use of "business" funds for your down payment will not impact your business operations (mini hint: no reputable CPA is going to write that letter FYI, see above about insurance...).
  • Your self-prepared ("stated income") 2019 YTD P&L shows that you're doing even better than you were in 2018 or 2017.
  • If you did ALL of the above including the super extra bonus hint: Then I'm over 60% sure that your 2018 taxes will be the ONLY basis of your income calculation, assuming of course an above-average competence lender local to the state where you are buying real estate. Thus, you qualify and buy that property and live happily ever after.

Minimum general paperwork for your lender to make the determination if the above will be applicable to you, this is true of your lender of choice if they choose for it to be true:

  • Gotta run your credit, can't run the AUS without that. Sorry, no one cares what your Credit Karma or Discover Card says, the AUS will not accept that, and the AUS is the decision engine. 
  • Need those filed tax returns. Don't care what you say you make, need to know what you told the IRS you make. If you try to tell Aunt Fannie Mae and Uncle Sam different numbers, your loan will be denied. They are married, they talk to each other, if you lie to one you are lying to both. Pay your tax bill.
  • Can skip on the other standard 10 or so documents otherwise normally needed for preapproval, this is a limited pre-preapproval to see if that is even a good use of your time to locate and send that other stuff in.
  • The above shouldn't take you longer than 20 minutes, tops, plus waiting for turnaround time.

There ya go. Generally good news for the self employed. Applicable to conventional loans generally, not FHA/VA.

  • Chris Mason
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