Self-Employed Borrowers Things to Consider When Applying For a Loan

It is important to be aware of the differences in qualifying for a self-employed borrower vs a salaried/hourly borrower. I just ran across the following scenario a few months ago, so make sure to be VERY communicative, open, and completely transparent about your business when speaking with your loan agent. And it is very important to make sure to be PREAPPROVED by a lender BEFORE you start searching for a property or doing a refinance. Always remember, your loan agent is on YOUR side and sharing as much information as possible can be very helpful to the process:
My client mentioned to me that he was self-employed for over 20 years, but he had changed his filing status as a Sole Proprietorship (Schedule C on personal tax return) to an S Corporation during 2021, after filing 2020 returns as a Sole Prop.  Years ago, that would NOT be an issue. However, after checking with Fannie Mae and Freddie Mac, it was determined that they will NOT allow self-employed income from a business whose tax filing structure has changed…until they have 12 months income verified through filing of the next return. This may seem a bit shocking, especially because nothing of note changed regarding the business, except for the tax structure. And just to be clear, since most all lenders sell to Fannie and Freddie, ALL those lenders would experience the same result. So make sure that even though YOU feel there shouldn’t be an issue, it is wise to check with the Professional before moving forward!
A couple of other considerations self-employed borrowers should be aware of as you consider a Pre-Approval:
If your company has been in business for 5 years or more, you MAY qualify to use ONLY 1 year of tax returns (which can be a huge benefit in most cases). Otherwise, the lender requires 2 years of taxes and will average the net income of the corporation IF the most recent year is higher. Should the prior year be higher, THAT year (the lowest year) will be used to determine income.
If you are paying yourself a W-2 wage through the corporation, it is wise to be very consistent with that wage. Consider the following: In 2019, the corporation paid you a $60,000 salary and the net income of the corp. was $50,000. In 2020, the corporation paid you a $30,000 salary and the net income of the corp. was $70,000. The lender will qualify you as follows: 1) First, the lender will want to know why the large reduction in salary 2) The lender will use ONLY the $30,000 salary 3) Additionally, the lender will AVERAGE the $50K net income and $70K net income for $60K. So, total income will be $30K + $60K for $90K. Even though in 2019 and 2020 those totals were $110K and $100K, respectively! That is why it is VERY WISE to consult a VERY experienced loan officer when you are considering restructuring!
Curt Kravitz is a 35 year-veteran Loan Officer, extremely experienced in helping self-employed borrowers achieve their goals! Call him at 661-705-2500. Option 1.