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ONE-YEAR TAX RETURN SELF-EMPLOYED MORTGAGE
I want to close business for 4-6 months due to covid. Would i get a mortgage loan. I’m self-employed wanting to qualify for a mortgage loan using 1 year of tax returns
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1 Reply
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Obtaining a mortgage when self-employed and ready to put the business on hold for 4-6 months is difficult but not impossible. Here is how lenders assess and approach this type of situation:
Relying on Only One Year’s Tax Returns
FHA and Conventional Loans:
- In most situations, lenders request at least two years of taxable income returns for the self-employed to ascertain that the individual is earning a steady income.
- Nevertheless, other lenders are positive, especially concerning the FHA, where one-year tax returns are accepted.
- This holds as long as the individual has been self-employed for at least a year and the tax returns for that year have positive figures.
Non-QM Loans: Non-QM stands for Non-Qualified Mortgage. Non-QM loans make the qualification criteria less stringent. One may also qualify using a year’s tax return or a bank statement. However, non-QM loans come at higher interest and require a bigger down payment.
Effect of the Business Closing
Income Stability: For reasons attributable to other income sources, lenders would also be looking to satisfy themselves by ensuring a permanent and relatively stable income, especially for self-employed borrowers. Interruption of normal activities by taking a break or temporarily closing the business could cause you to have concerns about your capacity to repay the loan even if you have good tax returns for that one year. It is expected that the lenders will want to know what you will do to earn income during a business closure.
Explaining the Gap: In this case, the lender will expect you to submit a letter outlining why you are abandoning the business, how long you intend to do so, and how you expect to fund your operations for that duration.
Compensating Factors
You realize that, because of the closure of your business, you will be incurring some risks. As such, you need compensating factors to counter the risks.
Larger down payment: In most cases, the more the down payment (e.g., for instance, more than 25% on the first shooting), the lesser risk that the lender takes on you
Strong assets/reserves: To qualify for the loan even when the business is not operational, it is important to have enough asset reserves to sustain mortgage payments for several months.
Low Debt-to-Income (DTI) Ratio: Keeping a DTI ratio within manageable levels will help demonstrate the ability to service the creditable amount when the business is up and running.
Alternative Loan Options
Bank Statement Loans: Several lenders offer bank statement loans meant for the self–employed, who receive self-employment income rather than their tax returns to determine income. This could be an option if you’ve been earning high income for several months and plan to shut down the business for now.
Non-QM Loans: These loans allow borrowers to qualify differently, such as not requiring a traditional income verification. If you intend to close your business, this may be a great option since you had a good income last year.
Preparing for the Application
Stay Current with All Payments: Ensure you are current on all debts and obligations, including taxes and other loans.
Provide Strong Documentation: In addition to your tax returns, be ready to provide additional documents such as profit and loss statements, bank account statements, and a projection of how you intend to finance yourself during the business’s closure.
Summary:
FHA and Conventional Loans: Requiring two years of tax returns is common. However, a few lenders may require one year for reasonable income and compensation factors.
Non-QM Loans: More flexibility and a better feeling regarding the closure of your business considerations.
Lender concerns: You must discuss how you will survive without income during the period your business will be closed. To calm the lender, you may need to make better deposits or have more reserves.
Given your explanation, are you interested in targeted lender options or structural tactics to optimize your mortgage application?