If you’re self-employed, congratulations! Working for yourself can be an exhilarating and rewarding experience, and a way to fulfill a long-held dream.
As a self-employed individual, you’re also in the vanguard of the changing workforce. Since the COVID-19 pandemic began, the number of people setting up their own shop has been burgeoning. There are about 9.4 million unincorporated self-employed workers in the U.S.
But as an entrepreneur, consultant or freelancer, you will find that being at the forefront of this evolution also has its challenges. For example, it may be nearly impossible for you to qualify for a traditional, government-backed mortgage—just as you’re thinking about a new home where you can set up a bigger office.
That’s because the mortgage loans backed by the government come with a strict set of criteria. Though stemming from regulations designed to protect consumers from loans that are beyond their means, the qualifying criteria can eliminate many responsible, credit-worthy people from the housing market. These can include self-employed borrowers and high-net-worth individuals who have permanently left the workforce.
For the self-employed, one “ask” is particularly challenging: Traditional lenders frequently want homebuyers to produce a W-2 pay stub form before they will underwrite a mortgage.
Non-Agency/Non-QM lenders have expanded to address this challenge and fill other gaps. They won’t make cookie-cutter decisions about your qualifications based on forms that you just can’t produce. Instead, they will see an opportunity to advance your homeownership goals with the credentials that you do bring to the table—such as your bank statements and 1099 tax forms.
These, along with other pertinent financial documents and information, enable Non-Agency/Non-QM lenders to structure a loan that aligns with your personal financial situation.
Flexibility for the Self-Employed
There are other ways that Non-Agency/Non-QM lenders are providing flexible terms that traditional lenders may not readily deliver. Among them: Non-QM/Non-Agency lenders may be more comfortable with a higher debt-to-income ratio (DTI) than other lenders, as long as you have demonstrated that this will not be an impediment.
Moreover, these lenders will often be flexible on measures such as LTVs (Loan to Value ratios) if you plan to make a smaller down payment (e.g., 10% or 15% of the value of the home), or if you are recovering from a recent credit impairment.
To be sure, their standards are still rigorous and not all applications will be approved. But by combining years of successful experience, a holistic review of each borrower’s financial picture and a dose of common sense, they are in a position to support homebuyers like you who would otherwise be underserved.
The Importance of Bank Statements
What documentation will these careful Non-Agency/Non-QM lenders use to qualify you? They will look primarily at your personal and business bank statements over a 12- or 24-month period. How large are your account balances? Do you pay your monthly bills regularly and on time, and do you have substantial savings left over? Are you consistently replenishing your accounts, and by how much? What are you depositing and spending from month to month?
How 1099 Income is Calculated for Mortgage Qualification
When they need additional insights, they will seek out other documentation such as 1099s, which show revenues for self-employed and contract employees. They will request the last one or two years of 1099 forms in order to calculate your average monthly income, and determine a predictable income amount for your application.
Painting a Complete Picture
Non-Agency/Non-QM lenders may also review other assets (such as investments) and potential sources of outside support, such as family members who may be able to contribute to a down payment.
For example, a freelance designer qualified for a $168,000 mortgage from Deephaven, with a 90% LTV and 10% down payment, based on her bank statements, 1099s, and her parents’ ability to help with reserve requirements.
Deephaven is committed to enabling credit-worthy self-employed borrowers to achieve their individual aspirations. As Non-Agency/Non-QM lenders, we believe that homeownership shouldn’t have to take a back seat to your professional fulfillment. Responsible mortgage lending can allow for both.