Many people believe that they would never be able to be approved for a mortgage because they cannot supply tax returns. But it is possible to receive a mortgage and purchase a home you love without the use of tax returns.
Getting a Mortgage as a business owner without showing tax returns
It is not uncommon for the self-employed to have several tax write-offs when filling out paperwork for local, state, and federal tax purposes. This can become problematic however when it comes to applying for a traditional home mortgage, the same way that everyone else does. Too many write-offs automatically look like the borrower has a risky debt-to-income ratio, by only looking at the writing on the paper.
A good mortgage option for a business owner with several tax write-offs is to seek out a bank statement home loan. This type of mortgage requires at least a 600 rating for a credit score, but the approval process allows someone who is self-employed with a more unique system of tax filing to prove their income with the use of bank statements and calculated off the base of bank deposits made. This style of home loan gets rid of any requirement to supply tax return paperwork for proof of income.
Self-Employed Borrowers Can Choose to Use Bank Statements from a Business Account
If you were hoping to use the business bank statements to show proof of income and qualify for a this mortgage you will need to be the one and only sole owner of the business attached to the account being used for income.
With bank statements from a business, you can either use an average of twelve months' deposits -50% expenses or twelve months' deposits minus any expenses confirmed by a licensed CPA.
Using a licensed CPA to confirm your expense factor will allow you to verify that your expenses are lower than 50%. This means that more of your income is used to verify that you are stable and will look better for a mortgage application.
How Personal Bank Statements Works to Qualify for This Type of Mortgage
If you use personal bank statements for a bank statement loan to qualify a borrower can be a partial owner of a business as opposed to the sole and only business owner. To be able to provide income with personal bank statements you will need to have worked in this business for a minimum of two years and your income is calculated on the basis of 12 months' worth of bank deposits. Any incoming deposits made to the account from sources other than your business will not be counted toward income.
You also need to present about three months' worth of business statements from your bank that verify the business is stable and maintains deposits from a business-type account to a personal account.
You Don’t Have to Use any Bank Statements at All
For a very solid candidate that meets a series of requirements, a profit, and loss-only mortgage could be an option. Proving that you have a solid stream of income able to pay the loan and then some is reached from a profit & loss statement. This statement will only be accepted when put together by a legal CPA. Along with the profit and loss statement, the CPA will be asked to include a letter claiming other solid facts about the business you run including the borrower's business name, how the borrower files their tax returns, the percentage of ownership the borrower has in the business, and the exact period of time the accountant has been working with the company.
A profit and loss home loan is most often referred to as a portfolio loan. These types of loans are non-conforming mortgages or “cookie-cutter mortgages” that do not go through the standard and common underwriting program process set by Fannie Mae and Freddie Mac.
Qualifying for a Mortgage Without Tax Returns as an Investor
Real estate investors typically take advantage of several ax write-offs which are beneficial and freely legal to use. These write-offs can cause the gross income to be below qualifying markers as it reads in paperwork (hard solid proof and evidence to a lender) as compared to the actual take-home amount of payments is.
Many real estate investors have found success with using a cash-flow mortgage. This type of mortgage uses income approval by the actual flow of cash from the property that you have invested in not on personal income records as they look on provable paper.
To verify this, a licensed appraiser will need to conduct research to confirm fair market rent the property pays for itself with rental income. If the property has negative cash flow there could still be a chance for mortgage approval depending upon the down payment amount or any existing equity in the property if you are seeking a refinance.
The cash-flow mortgage is a very promising option for many investors as it does not restrict you for approval based on the number of properties on which you carry a mortgage.
You Can Qualify for a Home Loan without Tax Returns on a Regular Wage as Well
For a borrower who is a salary or hourly employee, there are ways that you can apply for a mortgage without being required to provide tax returns for mortgage approval.
Many traditional requirements let the wage earner provide just a W-2 and the most current and up-to-date 30-day pay stub to prove your stability of income. A wage-earning borrower should be prepared for W-2 transcripts to be ordered to confirm the IRS records match what you have provided to the lender. The lender will do this step all on their own.
Lenders also often order verification of employment to make sure a wage-earner borrower is currently employed at the place of business that is reported on the application just prior to the closing of the loan. If you have received any bonuses or overtime pay your lender may ask for written and documented verification by employment from the business that you work to help solidify and prove the incentive pay on average you have received the last two years.
If 25% of the income is based upon commission pay you may be asked to submit paper tax returns. This requirement has to do with write-offs that employees that are commission-paid are eligible for on their taxes and often utilize.
For more information on tax return loans in Palm Desert, Palm Springs and California and all of your mortgage options please contact me anytime.