Most people would consider themselves to be self-employed if they own their own business. The mortgage industry, however, looks at the source of income to determine how to calculate a borrower’s qualifying income. Some examples of unusual income sources that could be treated as self-employed would be:
– 100% commission employees
– Those paid by the “job completed”
– Independent contractors
– Having 25% ownership or more in a company
– Rental properties or farm income
– Tip income
The mortgage guidelines require that a borrower with income from any of the sources above show a 2-year history of net income within the same industry and in most cases, the same geographic area. Underwriters will be looking at the borrower’s Federal Income Tax 1040 form to see what income and expenses are taken as deductions. For example, while claiming non-reimbursed business expenses is a great idea from an accounting standpoint, the total shown on page 3 of the individual tax return will be deducted from the borrower’s income. Tax transcripts from the IRS will be used to verify personal and corporate returns.
What about my business on the side?
Another source of income for many people is “side” businesses. These borrowers have full-time jobs but also receive income as tax preparers, cosmetic distributors, piano teachers, coaches, etc. The mortgage guidelines require lenders to also take that income or loss into consideration. The good news is that if the borrower can demonstrate a 2-year history on their tax returns, that income may be used. Unfortunately, a loss of income during the most recent tax year will result in a deduction from any qualifying income.
The best way to know what the mortgage industry will use for qualifying income is to speak to a professional loan officer.
Article By: Cheryl Cloud
Heritage Bank Mortgage
404-310-3753
NMLS# 545242
