Boston Property Management: Buying a home as a Self-Employed Person
Self-employed individuals won’t find it easy to qualify for a mortgage as they have to abide by a different set of rules. They have updated the rules for self-employed individuals where lenders will take a closer look at your business income. This post explores what the changes entail.
Self-employed borrower basics
Income and assets are two of the most important aspects of the mortgage. They need to know how much you can afford to pay and where the down payment is coming from. Self-employed borrowers usually show the income from their share in a LLC, partnership or corporation. If you are a sole proprietor, then you need to file your self-employed income on IRS Schedule C so that you can show your income and expenses.
Sole Proprietors also need to use their net income from Schedule C. Following that you can calculate a 24-month average of net income. In the event that you are self-employed through a corporation, LLC, partnership then you have to file a separate set of returns. Furthermore, if you own more than 25 percent of the business you have to provide the lenders with full business tax returns as well as your personal returns.
Lenders may allow some self-employed borrowers to use the funds in their business as a down payment as long as it does not affect your business.
Boston Property Management: New rules for self-employed borrowers
The new rules dictate that lenders will be stricter when it comes to partnerships and S corporations. It also emphasizes the fact that a lender will determine whether a company can support itself if the owner withdraws money for the deposit.
If you belong to that category, your income will show up in Schedule K-1. They also end up on your personal tax return as income, which can be either “ordinary business income” or “Distributions”.
The rules dictate that if your distributions are more than the ordinary business income, then you can use the ordinary business income. If it is the reverse, then you have to go through another set of guidelines.
These guidelines are not set in stone as they vary from lender to lender. So the best way to find out is to check with all the lenders in your area so that they can analyze your tax returns and give you an answer.
We hope you liked our post “Boston Property Management: Buying a home as a Self-Employed Person”.