Laguna Hills, Calif .– (Newsfile Corp. – September 30, 2021) – In a recent advancement, Mike Pacheco of Qualified Home Loans said their new opportunity will help people who are self-employed and who want a home loan approval. It’s no secret that one of the most important factors in qualifying for a mortgage loan is demonstrable income. Lenders, both large and small, rightly want to know that individuals receive money on a regular basis as it is a good sign that individuals will be able to repay the money they borrowed. Traditional homebuyers can prove this by submitting a W2 from their employer that shows how much money they make week after week or month after month. However, things get a little trickier with self-employed mortgages. Mike Pacheco of Qualified Home Loans, an independent mortgage company specializing in helping the self-employed secure home finance, explains why.
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Unlike a traditional homebuyer, self-employed homebuyers cannot simply provide a W2 to prove their income. Instead, self-employed applicants are expected to be able to provide evidence of their income based on their income tax return for the past two years. It can be a chore to gather this information and other supporting materials, but it is required when applying for a mortgage. The real challenge, however, comes when it comes time to address any discrepancies between what a self-employed borrower believes in income and their tax returns.
The most common problem self-employed people encounter when applying for a mortgage loan is differentiating between the amount they believe they are earning before depreciation and the amount the lender is actually taking as qualifying net income, according to their tax return.
Despite having ample cash flow and access to credit through their business accounts, the self-employed are often shocked to learn what their net income is after tax depreciation and other business expenses. For example, a self-employed electrician can have $ 200,000 in gross sales, but if he writes off $ 190,000, he leaves $ 10,000 in taxable income. Your gross income is very different from your net income.
Fannie Mae and Freddie Mac, as well as the FHA and VA, all base their lending decisions on net income from tax returns. There are non-conventional loan programs that qualify without a tax return (such as those that use bank statement deposits). However, these loans all come with higher interest rates, higher costs, and higher down payment requirements.
Pacheco divides the three categories of self-employed loans. These depend on the method of qualification and the documentation of income.
Complete document (tax returns) – These are the best loans with the lowest down payment, best interest rates, and often with government support (Fannie Mae, Freddie Mac, FHA, VA). In 2008, in response to the mortgage crisis, the government created a requirement that lenders document that customers have some “ability to repay”. A tax return is required for self-employed or small business owners. No magic program offers these premium loans to self-employed people who cannot prove any tax income. These interest rates are usually between 2.625% – 3.375% for a 30-year fixed loan, depending on occupancy, purpose, type of property, mortgage lending value, etc. These can often be obtained at no cost.
Alternative documentation – Alternative documentation uses a different method of qualification instead of tax returns. Here are a few examples: Using business statements / deposits to calculate income instead of taxes; Qualification of a rental property exclusively from its expected rent; Company income statements are used as income documentation; and others like asset depletion. The possibilities get a bit endless here, but the terms are becoming less and less desirable when compared to full doc loans. These programs range from 3.25% to 5.875% depending on qualifications, creditworthiness, LTV, etc. For example, a purchase with a 40% decrease using 12 month statements and high credit is likely to be 3.25-3 , 45%. The same customer with a 10% drop is expected to be around 5.0-5.25%. These loans usually come at a cost.
True No Documentation – Some lenders, called community development lenders, are granted a unique carve-out that allows them to issue true no-doc credit, even on self-used loans, and no income is measured at all. These loans can provide non-traditional mortgage finance to low-income households, small business owners, immigrants, and other diverse borrowers. Tax returns are not used to tell the full story, rather lenders base their underwriting decisions on the borrower’s character, credit, equity, and overall circumstances. These loans require 25% of the value or withdrawals up to 65% of the value. Interest rates range from 5.5% to 5.625%, and the loans usually come with a cost.
Business owners, really anyone, would prefer a full doc loan, however Pacheco has experienced an issue working with self-employed clients over the past year.
Self Employed Borrowers: Current Challenges
The COVID-19 pandemic had a devastating impact on the global economy in 2020. The world has seen record unemployment rates and unprecedented drop in sales, making 2020 a bad year for many entrepreneurs. As a result, many self-employed people interested in housing have had to postpone their big purchases until their income stabilizes. In addition, the best loans are not available as the taxes filed in 2020 do not support enough income for many business owners. While 2019 was good and companies are on track in 2021, their “qualifying income” is likely based entirely on their 2020 tax returns!
“Companies seem to be more resilient and healthier now. However, no good credit, solid assets, or equity can overcome the lack of income in taxes in 2020. For example, you have perfect loans and $ 1.0m, but your 2020 taxes are looking bad. While there are still credits to be had, you may not qualify for a refi and put your 4.0% interest rate on the top 2 , 75% lower that you see everywhere. We can’t even consider the time a company was forcibly closed. It’s common sense, but credit is about rules, not logic, ”shares Pacheco.
Self Employed Borrowers: The Opportunity
The taxes submitted for 2021 represent a unique opportunity: a clean slate.
Many programs allow applicants to completely ignore 2020 tax returns and only use their 2021 taxes. Loss carryforwards from 2020 would also be ignored. In 2020, taxes will not even be made available to the lender.
This works for conventional and jumbo loans, homes, second homes, investment properties, purchases, refinances, and withdrawals. This means that 30-year fixed loans below 3.0% are within reach. Purchases can be made from a down payment of 5.0%. Individuals can potentially take cash out of their home for improvements and even lower their price at the same time. Your 2021 tax returns could be key to unlocking amazing credit opportunities that are not currently available to you.
Commenting on the opportunity, Pacheco said, “When you are self-employed, you are back in the driver’s seat. Planning ahead to use your 2021 taxes to qualify for the loan you want is key. ”Not every loan or situation enables individuals to use 2021 taxes. It is especially important for those who want to make a purchase to start collecting their information and solutions now. While it may be true that becoming a self-employed borrower means more upfront work, qualified home loan is fully equipped to help individuals succeed.
Qualified Home Loans is constantly working with self-employed home buyers to help them qualify for a functioning mortgage loan. For more information, contact Mike and the team by visiting qualifiedehomeloans.com.
Contact person: Mike Pacheco
Company Name: Qualified home loans
E-mail: [email protected]
Phone number: 949-528-3967
To view the source version of this press release, please visit https://www.newsfilecorp.com/release/98148