How is Income Calculated for Self-Employed Borrowers for FHA or Conventional Financing?

How is Income Calculated for Self-Employed Borrowers for FHA or Conventional Financing?When it comes to housing, the vast majority of buyers are going to need loans, and loans are going to require income analysis on the part of the organization offering the loan.  Whether seeking out conventional financing or FHA loans, buyers can expect to answer numerous questions about their income and to have to provide proof of that income.  For buyers who are employed by a company, this can be as simple as providing paystubs, letters of verification, and deposit statements, but for those who are self-employed, the process can seem less obvious.

Income calculations for self-employed borrowers are less complex than one might think, despite the fact that it is indeed different than the process for company-employed borrowers.  Thankfully, precedent and guidelines exist for self-employed borrowers looking to get the right loan for the home of their dreams.

Good record keeping makes for smooth sailing in home financing

One of the most important facts to know about income calculations for self-employed borrowers is that many banks have a two-year records requirement.  If a borrower hasn’t been in business self-employed for two years, they may need to submit both self-employment and previous employment information.  If they have been in business and have records for the last two years, there are some specific records that will be most helpful to the borrower.

The most relevant records that a self-employed borrower can provide is tax returns.  Self-employed workers usually pay estimated taxes in advance, quarterly.  These records are reconciled during tax season to produce a tax return that is quite similar to those an employee of another company might have.  A bank can utilize tax returns to make a loan decision based off reported income.

Another incredibly important document that self-employed individuals can provide to loan organizations is a profits and losses statement.  This a document that self-employed individuals prepare themselves from records of their income, business costs, and calculations that result from those records.  While profits and losses statements do not have to record every bank transaction on the part of a self-employed individual, they do provide basic information about contracts, sales, other forms of income like royalties, and all kinds of business losses.  Banks can use these statements in conjunction with tax returns to help verify income.

Self-employed individuals should be aware that if they have an incorporated business, they will likely need to provide their personal tax returns alongside their business’s tax returns.  Many loan organizations and banks will also require letters from business owners, accountants, or other verifiable individuals who can support the business’s legitimacy.

Preparing for the property buying process

Verifying income as a self-employed buyer has a few more steps than verifying income for traditionally employed buyers; however, proper record keeping and the organization of those records can ensure the process is simple, effective, and brings meaningful results.

Contact Christopher Lechner when purchasing your new home

Christopher Lechner is an experienced realtor whose numerous successes in the real estate market have left him with true expertise in the property buying process.  If you’d like to be sure you navigate income verification and calculation the best you possibly can, contact Christopher Lechner today at (562) 221-0055 when making your next real estate decision.