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MORTGAGE KNOWLEDGE CENTER

PenFed Mortgage with Confidence

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CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

  1. Home
  2. Mortgage Knowledge Center
  3. Basics of Self-Employed Mortgage Loans

MORTGAGE

Basics of Self-Employed Mortgage Loans

EXPECTED READ TIME: 5 MINUTES

June 18, 2021

Business owners looking for self-employed home loans should know they can get the same mortgages as W2 employed borrowers. Whether it's a conventional or government-backed loan like FHA or VA — the type of loan a borrower receives is the same regardless of their income source. But the foremost challenge for the self-employed borrower is proving their income. Read on to learn how business owners can prepare and be successful when applying for a mortgage.

Proof of Income for the Self-Employed

What is self-employment income? It's profits and losses from a business the borrower has 25% or more ownership. The borrower can be a sole-proprietor or independent contractor with a few or several clients. Or the borrower can have or be part of a partnership, LLC, or corporation.

To count the income, the borrower has to be self-employed for at least two years. One-year self-employed income may be considered if the borrower is in the same line of work.

Here's an example. Joe has been a plumber for six years. One year ago, he started his own plumbing business. There were no gaps in employment, and his income is stable and increasing. He's making more now than he did as an employee. Joe keeps excellent financial records, his credit score is 700, and he has very little debt. Because of this — Joe has a good chance of getting a mortgage.  

What does the underwriter look for?

When looking at a loan application, one of the main things the underwriter does is examine the borrowers' income and financial documentation. The underwriter needs to ensure the income is stable and will continue. In addition, they'll make sure the income isn't declining.

The primary way the underwriter verifies self-employed income is with tax returns — both personal and business. When calculating the income, some tax deductions can be added back. For example, depreciation or depletion. Loan officers, processors, and underwriters can use income worksheets to calculate self-employment income accurately. Depending on the size and complexity of the business, calculating income can be very involved. That's where the income worksheets come in.

How to Calculate Self-Employed Income for a Mortgage

Business owners that receive a regular paycheck and W2, have an easier time with documentation. They'll still need to supply their taxes but having a salary and W2 is a great way to document stable ongoing income.

With co-borrowers, sometimes, one borrower is self-employed, and the other one has a regular job. The income from the W2 employed borrower can also be used and, in many cases, make the difference in getting approved.

What income can't be counted?

Take a look at this list of income that cannot be counted.

Income That Can't be Verified

Here's an example. A business owner receives cash payments but doesn't count that income on their taxes. That income cannot be used.

Another problem is when business and personal bank accounts get mixed up. For example, if some business income gets deposited into the personal checking account and others into the business, and some checks are cashed instead of deposited — keeping track of funds becomes a problem. Besides looking at taxes, bank statements are also reviewed. The financial documentation must make sense when comparing with the application.

That's why it's vitally important to have business and personal funds separate. Business expenses and deposits should only go into the business account. Personal expenses and deposits should only go into the personal account.

Unstable Income Can't Be Used

The underwriter is looking for a stable income. So, if it's not, it can't be counted. An example could be the sale of an asset like real estate or equipment. If it's a one-time sale, that wouldn't be calculated. Another example could be self-employed income from a sales job where there are huge swings in income and gaps with no income. That wouldn't be counted because it's not stable.  

But keep in mind, seasonal income is different from unstable income. For example, if you have a house painting business and make the majority of your income six months out of the year, that income can be counted. That is, as long as the business is at least two years old, the income can be documented, and it will continue.

Private Mortgage Lenders for the Self-Employed

Besides conventional or government-backed home loans, there are private mortgage lenders for the self-employed. They have loan programs that have alternative ways to prove income. For example, some loans use bank statements rather than tax returns. These types of loans have high interest rates and often come with pre-payment penalties. There is no comparison between that type of self-employed loan to conventional or government-backed mortgages with attractive rates.

Rather than take out a high-cost loan, many borrowers choose to work on their income documentation so they can qualify for a conventional or government-backed mortgage.

Credit unions, banks, and mortgage brokers can be good self-employed mortgage lenders as long as they know how to work with business owners. And that includes knowing how to read tax returns and use income worksheets if needed.

Self-Employed Mortgage Requirements

Getting a mortgage when self-employed also requires more documentation than for W2 employed.

Here are the primary documents needed for a self-employed mortgage:

  • Business taxes for the last two years, signed and dated with all applicable schedules
  • Personal taxes for the last two years, signed and dated with all applicable schedules
  • Year-to-date profit and loss and balance sheet 
  • Business license
  • S-corporations will need a business credit report
  • Business bank statements, from the most recent two months
  • Personal bank statements, from the most recent two months
  • Evidence there is enough cash to close from personal, not business funds

Besides verifying income, the borrowers will still need good credit and a score of 620 and above. And just like any other type of loan, they'll need an acceptable debt-to-income (DTI) ratio of 43% or lower. Debts include mortgages, credit cards, auto loans, child support, etc.

Here's an example of the DTI calculation:

  • Monthly debts = $4,000
  • Divided by monthly income = $10,000
  • DTI ratio = 40%

Main Take-Away for Self-Employed Borrowers

Self-employed borrowers have more challenges than a wage earner. But, with careful planning, getting the financing to buy or refinance a home is possible.

Savvy borrowers have all of their documents together before they apply. And they keep everything close at hand in case anything is needed again. Showing proof of income can be a challenge, but it's worth it in the end. Here's to organized businesses and successful self-employed homeowners.

For more information about PenFed Mortgages:
 

PenFed Mortgage: 

800-970-7766

Get Started

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image

CONVENTIONAL LOANS

Rates starting at % (APR %)¹

 

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Home Buying Steps

  • Getting Started
  • Finding a Home
  • Getting a Mortgage
  • Home Ownership

Mortgage Topics

  • VA Loans
  • Conventional Loans
  • First Time Homebuyer
  • Home Equity
  • Homebuying 101
  • Checklists
  • Adjustable Rate Mortgages
  • PenFed Top 10
  • Refinance
  • Jumbo Loans
  • FHA
  • Videos

Mortgage Products

  • Mortgage Center
  • Refinancing
  • Home Equity

PenFed HELOC

Rates as Low as % APR* with flexible use of funds

Apply before becoming a member.

After your application, we’ll help you:

1. Discover you’re eligible to become a PenFed member

2. Open a Savings/Share Account and deposit at least $5

Disclosures

1Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on discount point, which equals percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.

*Prime Rate is % as of . The APR for this Home Equity Line of Credit (HELOC) is based on prime plus a margin and can change monthly. Fixed Rate Advances will be amortized over the Fixed Rate Advance Term, with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin, and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes.

  • Annual Fee: Notwithstanding the foregoing, an annual fee of $99 will be assessed on each account anniversary.
  • Home equity lines of credit (HELOC) are variable rate loans and the interest rate is subject to increase after consummation of the loan on monthly basis. Closing costs range between $500 and $8,500 for credit lines of $500,000. Contact a representative for additional details.

Appraisals: PenFed will attempt to establish value via an independent method. If that method is unsuccessful, or the value is not sufficient for the amount requested, an appraisal will be required regardless of CLTV. An appraisal is always required in the following circumstances:

For all loans with a loan amount greater than $400,000.

If an appraisal is required, it must be ordered by PenFed. You will be contacted for authorization and payment prior to ordering. Appraisal fees average $550 to $850 (some run higher).

  • Closing Cost Credit: PenFed will pay most closing costs associated with a home equity line of credit (HELOC), which includes credit report, flood certification, settlement/closing, property ownership and encumbrances search, recording, property search, and quick close. Member is responsible for any city, county, and/or state taxes if the subject property is located in FL, LA, MD, MN, NY, TN, or VA. If an appraisal is required, the member, who is responsible for the fee whether or not the loan closes, will pay the cost.

Interest may be tax deductible, consult a tax advisor for further information regarding the tax deductibility of interest and charges.

Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Draw Period. During your Draw Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.

Fixed Rate Advances will be amortized over the Fixed Rate Advance Term with the payment consisting of principal and interest. Your Annual Percentage Rate for a Fixed Rate Advance will be calculated by adding your Prime Rate, your Margin and the Additional Fixed Rate Lock-In Margin. Your Annual Percentage Rate for a Fixed Rate Advance shall not exceed 18% and shall be equal to or greater than % for primary residences and second homes and 4.75% for investment properties.

Property Insurance: Property insurance is required.

Multiple PenFed Loans: Multiple PenFed Equity loans and HELOCs are available as long as the member and collateral qualify (except Texas). For Equity loans and HELOCs the total indebtedness cannot exceed $500,000 for all PenFed Equity and HELOCs combined.

PenFed does not lend on:

  • Mobile homes
  • Co-ops or time-shares
  • Properties that are currently listed on the market for sale
  • Commercial property or property used for commercial purposes, even if a residence is part of the property
  • Undeveloped property (land only)
  • Properties with more than 4 units

Properties that are currently under major construction/renovations: Property must be fully livable, with no safety issues. (Examples: no missing rails from stairs/decks, no open walls with wires showing, missing kitchen appliances/counters, missing bath fixtures or unfinished pool).

  • Additional limitations may apply

Home Equity Line of Credit:

  • This Account has a Draw Period of 10 years, followed by a repayment period of 20 years.
  • If only minimum payments are made during the draw period, the loan balance will not decrease.
  • In Texas, the maximum CLTV available is 80% on owner occupied properties. Additional restrictions apply in Texas, so please ask a representative for details.
  • In all other states, the maximum CLTV is 85% on owner occupied properties and second homes. Additional restrictions or requirements may apply based on application characteristics.
  • Property type of Condo has a maximum CLTV of 80%.
  • The maximum CLTV available is dependent on credit qualification.
  • Rates vary depending on owner occupancy and CLTV and other loan criteria.

Minimum Loan Amount Requirements in all States:

  • For an owner occupied property or second home the minimum loan amount is $25,000 and the maximum amount is $500,000 with a CLTV of 85% or less of the fair market value.

Other terms and conditions apply; call 844-918-4307 to speak with a representative for details. All rates and offers are subject to change without notice. To receive advertised product, you must become a member of PenFed.

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This credit union is federally insured by the National Credit Union Administration. Rates are current as of September 2023 unless otherwise noted and are subject to change.

APY = Annual Percentage Yield
APR = Annual Percentage Rate


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The content you are about to view is produced by a third party unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Realty, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Realty, LLC, see the Affiliate Business Arrangement Disclosure.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party Website.


The content you are about to view is produced by a third party website that is unaffiliated to Pentagon Federal Credit Union. PenFed takes no responsibility for the content of the page.


IMPORTANT NOTICE

You are leaving PenFed.org and entering a third party site. PenFed Title, LLC is wholly owned by PenFed and this referral may provide PenFed a financial or other benefit.


For more information about the relationship between PenFed and PenFed Title, LLC, see the Affiliate Business Arrangement Disclosure.


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