Getting a loan approval is difficult when you are self-employed. Last October, my wife began her independent consulting business and it has been a tremendous success.
She was making good money before, but her independent work is bringing 4X's her previous income. We just started the first time home buyer process and are working with two mortgage brokers to get a home loan.
We wanted to act conservatively and only base our loan off of my income and her previous income while she was a W-2 (significantly less than her independent consulting income); however, the brokers are telling us we can't factor any income for her because there is not a two year history of independent consulting income even though she has a stable history of previous W-2 income.
Anyone have any advice on how we can apply both our incomes for a home loan? It doesn't seem fair that someone making $30K can qualify for a loan before my wife who's salary dwarfs that amount.
She has job offers on the table for a very nice annual income but the opportunity at hand for the independent consulting is too large to pass on.
====ANSWER====
Hello Larry,
First I want to congratulate you and your wife for her successful business. What a good problem to have when you have plenty of income and cannot use it when applying for a mortgage.
I fully understand your pain. My wife and I have been there for many years. When being self-employed we seem to be penalized by the lenders even though we are making lots of money and can certainly afford the mortgage payment.
Just try to look at it from the lenders point of view for a moment. The one and only interest they have is getting paid back the money they loan with interest. That is how they make their money right?
So if a person who is self-employed comes to you who just quit their job less than a year ago (last October 2009) and they are making much more as a self-employed person how can I verify the income?? The lender will require proof you have the income.
So the only way they do that is to look at the last 2 years of tax returns. Even then, this may hurt you because if you have a CPA worth their salt, you will not show much profit so you can pay the least tax. So your income will look low.
It is really a catch 22 as they say in the business world. We have our cake, we are eating it and nobody will loan us any money. Ugh!!
I also am a small business consultant. After retiring from mortgages I went into this field. Even though my gross income is very good, my taxable income is quite low thus making it hard to borrow money.
If your wife runs her business as a C-Corp or S-Corp and strips out the profit, it may appear the company has no income at all. Then the income ends up on her 1040 form. So, after a few years, you have a history of steady income and then lenders will work with you.
So in conclusion (sorry I got long winded) the mortgage brokers you are talking with are correct. You will only be able to use your W-2 income to qualify for a loan. It looks to the lender like your wife no longer has a job.
This may limit how much you can borrow. So my advice is, wait a couple of years before purchasing a home and save up a HUGE down payment, or buy now using your past 2 years of W-2 income and upgrade to a bigger house in a few years.
One thing for sure my friend, becoming a home owner is better than renting. The question is when to buy for you. I wish you the best!
I too am self-employed. I think it stinks that it is so difficult to get a loan!!! Too bad there is not a loan program out there for the self-employed!!
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