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Question: We have visited several mortgage lenders to pre-qualify for a loan. We have very good incomes, but to lenders we seem on the brink of poverty. The problem is we are self-employed, have lots of write-offs and don’t show much income on our tax returns. What can we do?
Answer: Lenders strongly rely on tax returns when trying to calculate the ability to borrow. However, many entrepreneurs have good cash flow and significant income yet because of various deductions, they seem to have less income than lenders need for a given mortgage.
What you need is an alternative way to qualify. In recent years lenders have tried to expand the “credit box” in different ways because nearly 35 million households are unbanked or under-banked according to the FDIC. So, for example, lenders might be willing to accept rental checks and utility bills as evidence of credit.
Because you have a good income your situation is different. You likely are “banked” and have a good credit score. What you don’t have is sufficient income if lenders look no further than your tax statements.
Under Dodd-Frank lenders must make “a reasonable and good faith determination based on verified and documented information that, at the time the loan is consummated, the consumer has a reasonable ability to repay the loan.” Tax returns can help meet this standard but in some cases, so will other paperwork.
The trick is to find lenders with more flexible qualification standards. Look for lenders that will consider an application on the basis of your bank statements. In such a situation the lender will likely want 12 to 24 consecutive bank statements. The lender will then average deposits to come up with a monthly income.
The advantage here is that all of your income shows, there are no deductions in the sense of what you find on a tax return. The result is that you will likely have a higher income for application purposes.
The bank statement approach, however, is not without hurdles. Different lenders have different requirements and you can expect several related paperwork demands:
Lenders will want to see business account records and tax returns. If bank account records show overdrafts those will potentially weigh against the borrower. Also, there must be some reasonable relationship between deposits and your work. In many instances, there will be higher down payment requirements than with typical financing. And, since you’re asking the lender to do extra work, there may be additional costs.
For details and specifics call around and see if you can find a local lender that will consider an application based on bank statements. Be sure to ask about requirements, rates and costs.
Peter G. Miller is author of "The Common-Sense Mortgage," (Kindle 2016). Have a question? Please write to firstname.lastname@example.org.View Foreclosure Article Archives
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