Getting A Mortgage During the Great Resignation
Headlines are all talking about the Great Resignation. While workers are definitely leaving their jobs in record numbers, they aren’t all simply hanging up their hats. Instead, Americans are shifting to new opportunities, many of them reclassifying themselves as self-employed. A study by MBO Partners found that even before the pandemic shook up our work lives, approximately 40 million Americans reported as gig workers in 2018 and 2019. They also predicted that more than half of American workers will be independent laborers by 2023. The flexibility of location and time is a major plus for gig workers, particularly during the pandemic when childcare can be spotty.
Others have ditched their jobs to become their own bosses. According to NBC News, “From January through November, just under 5 million new business applications were submitted, a jump of 55 percent over the same period in 2019. From January through November, just under 5 million new business applications were submitted, a jump of 55 percent over the same period in 2019.” With so many Americans hopping into the self-employed bucket, we figured it’s time to take a look at what it takes to get a mortgage when you aren’t a traditional W2 wage earner.
Who Is Considered Self-Employed?
Business owners are just part of the self-employed puzzle. Here are some general scenarios that will likely place you in the self-employed category:
- You receive 1099 tax forms
- You are a contractor or freelancer
- At least 25% of your income is from self-employment
- You own 25% or more of a business
- Most of your income is from dividends and interest
- You do not receive W2 tax forms
Tip: If you have enough income and equity to qualify for a mortgage without including your self-employed income, you do not have to include it on your mortgage application.
Why Is It More Difficult?
The truth is, it’s not! Self-employed borrowers are generally required to provide more documents to support their income history, but the same rules apply to all borrowers. If you have proof of income and assets that meet the standard conventional requirements, you’re all set. The paperwork used to determine this will differ from a standard W-2 wage earner. Get prepared by compiling your documents in advance.
Typical requirements for a self-employed borrower:
- Business License
- 2 Years of Business Tax Returns (e.g. form 1120-S and K-1, 1120 and 1099-C, etc.)
- 2 Years of Personal Tax Returns
- W2 if paid a wage from your business
- NEW AS OF FEBRUARY 2, 2022! Business activity can be proven with:
- Evidence of current work (executed contracts or signed invoices that indicate the business is operating on the day the lender verifies self–employment;
- evidence of current business receipts within 20 days of the note date (payment for services performed);
- lender certification the business is open and operating (lender confirmed through a phone call or other means); or
- business website demonstrating activity supporting current business operations (timely appointments for estimates or service can be scheduled).
- Note: If the most recent return is prior to 2020, there will be different requirements for conventional financing.
Tip: If you have been self-employed for at least 5 years, you might only need to provide 1 year of business/personal tax returns.
We recommend having your accountant work with you to prepare these documents in advance of your mortgage application so that you have all the items needed up front. It helps ensure a smooth and prompt process. If you have questions regarding what documents you need to provide, we’re here to help you navigate the requirements.
Okay, so what if you don’t fit into the neat bucket of a self-employed borrower who has had the same job for 2 years? You might want to consider an alternative document loan (alt-doc loan). These loans have more flexibility in their requirements. Because of this, the risk to the lender is greater which will translate to a slightly higher interest rate. In general, these loan types will require a bank statement, P & L and 1099. Here are two commonly used options.
Bank Statement Loan
A bank statement mortgage uses a self-employed borrower’s bank statements to prove income instead of tax returns. This loan type is generally available for purchases as well as cash-out and rate-and-term refinances for primary and second homes as well as investment properties.
DSCR (Debt Service Coverage Ratio) Loan
If you are looking specifically for an investment property mortgage, a DSCR loan is a great option. It is only for non-owner occupied investment properties. No income documentation is required. The calculated rental income from the property is used instead.
Ready to Apply?
We’re here for you from initial questions to applying and navigating the underwriting process. We have a solid background in helping self-employed borrowers make their homeownership dreams come true. We know the guidelines and the options available and can help you choose the loan that best fits your needs. Reach out today to find out more.