Self Employed Person Getting a Stated Income Mortgage
Dear Ross, I run a successful plumbing business, and my mortgage is coming up for renewal. I’m thinking of refinancing and maybe taking out some equity to invest into expanding my business. But I hear it’s very difficult to get approved now if I don’t declare sufficient income on my income taxes. What’s a guy to do? Z.T., Woodbridge.
If you are self employed and you have sufficient income, you will be qualified for a mortgage just like everyone else. The only difference being the lenders will typically want to take your average net income from your tax returns for the previous two years when they calculate your debt service ratios. There should be no hassle nor should you pay an interest rate premium.
But many self employed people (we call them BFS – business for self) use generally accepted accounting practices to get their taxable income fairly low; and this reported income is not enough to meet the debt service ratio requirements. The solution has been to self declare an amount of income you make from you business; said amount to be enough to satisfy your lender’s underwriting criteria. This is called a stated income approach.
Five years ago, this was no big deal. But progressively over the past few years, lenders have tightened up their underwriting criteria, to the point where many will not consider a stated income approach at all. An alternative lender (sometimes called ‘B’ lenders) might consider a down payment of only 25% to 30%, but you will often pay a rate premium and perhaps a one time lender’s fee to get the mortgage.
Banks typically don’t take this approach to underwriting, but there are a few strong lenders such as Street Capital and First National Financial who will, with as little as a ten percent down payment. The approach has to make sense. The amount of income you self declare has to be consistent with the nature of your business. And you maybe asked to provide supporting information such as invoices, business bank statements, and your personal tax returns.
So if you can meet these criteria Z, a good mortgage agent can help you.
Ross Taylor & Associates – Connect With Us