Mortgage  Question?
Best Mortgage Self Employed Borrower Increasing Income

What is the best mortgage program for a self-employed borrower with increasing monthly income? Do I need to wait until the higher income is reflected on my tax returns or are there other programs that would enable me to qualify for a higher loan amount sooner.

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

For standard self-employed borrower mortgage programs, such as conventional and FHA loans, your income when you apply for the loan is based on your tax returns for the prior two years. Lenders average your income as reported on your tax returns for the two year period and divide by twelve to calculate the gross income used to determine what size mortgage you qualify for.  Only one year of self-employed tax returns may be required if you previously worked in a similar field and currently earn a similar or greater income.

For self-employed borrowers whose incomes increase significantly over the course of the year, the tax return requirement means that they need to wait until the end of the year, after their returns are prepared, to benefit from the increase. For example, if your monthly gross income increases significantly during the first six months of 2018, you need to wait until 2019, when your 2018 tax returns are prepared, to apply for a mortgage using the higher income amount.    Most borrowers would prefer not to wait to apply for a mortgage but they may not qualify for the loan amount they are seeking unless they wait for an additional year of tax returns. 

Your alternative to using a standard self-employed borrower program is to use a bank statement mortgage program. As the name suggests, bank statement programs enable borrowers to qualify for a mortgage based on their bank statements instead of their tax returns which is why they are popular with self-employed borrowers. Many bank statement programs only require twelve months of statements to verify your income (although some programs may require 24 months). Additionally, you can use statements for the most recent twelve months instead of waiting until the end of the year, like you would for a tax return. This means that bank statement programs enable borrowers to benefit from increases in their income sooner. For example, if your income increased over the six months ending in April, you could use this increased monthly income if you apply for a mortgage in May. We explain how bank statement mortgages work on FREEandCLEAR.

The downsides of a bank statement loan are that they typically charge a higher mortgage rate plus the qualification guidelines can be more restrictive in certain areas. For example, the required down payment for most bank statement loans is 10%, and significantly higher for borrowers with lower credit scores, as compared to the 3% down payment required for a conventional loan and the 3.5% down payment required for an FHA loan. Additionally, a higher mortgage rate reduces what size mortgage you can afford, so there is a trade off as compared to standard self-employed borrower programs,

I recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review lenders in your area by clicking MORTGAGE RATES We advise you to contact at least four lenders as qualification guidelines vary. When you contact lenders you can determine what loan amount you qualify for depending on the loan program -- a standard self-employed borrower loan or a bank statement mortgage.

You can also use our FREEandCLEAR Lender Directory to search for lenders by state, lender type and loan program. For example, you can search for lenders in your state that offer bank statement loans or mortgage for self-employed borrowers.

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About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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