Mortgages For Self Employed: The Complete Guide

August 23, 2022

Self-employed borrowers looking for a mortgage, whether it is for a new home purchase or a refinance, shouldn’t worry about qualifying using their W-2s. There are many self-employed who can get a traditional loan using a W-2, but there are just as many if not more who take allowed tax deductions and cannot qualify using their tax returns. This does not present a challenge if you know a lender who offers a Bank Statement loan specifically for self-employed borrowers. This guide details what a Bank Statement loan is and the requirements for eligibility. The good news is that Bank Statement loans close just as easily and quickly as a traditional loan!

What is a Bank Statement Loan?

A Bank Statement loan is a mortgage for self-employed borrowers including 1099 earners. Eligible self-employed borrowers can qualify for this loan type using personal or business bank statements instead of tax returns. One challenge self-employed people can have when getting a loan is reduced qualifying income due to the the allowed business expenses they take to reduce taxable income. The answer is not to stop taking deductions to use W-2s, but to utilize another loan option that verifies income another way. Bank Statement loans are one of the most utilized loan products at Angel Oak because it does not require tax returns. Qualifying income is derived from 12 or 24 months of personal or business bank statements. It has saved the day for many self-employed borrowers who were turned away by lenders because they did not have a Bank Statement loan to pivot to when traditional financing wasn’t going to work. It is a loan product every self-employed homebuyer and Realtor should know about.

What is the profile of a self-employed borrower?

Self-employed borrowers that we work with have good to excellent credit and typically are buying a more expensive home. They have large down payments and can afford the home, but tax returns can’t determine ability-to-repay (ATR) as required by the Dodd Frank act. Many Realtors have told self-employed who can’t qualify using tax returns that they can’t help them. Some have advised them to not take tax deductions and try again in a year or two. The truth is that these borrowers are most likely eligible and can close quickly on a home without making changes to the deductions they take at tax time. They simply do not need W-2s for qualification. Realtors have missed commissions and potentially referrals simply because they didn’t know about Bank Statement loans. Self-employed and 1099 earners are credit-worthy borrowers who are underserved in the market. The solution is a Bank Statement loan for those who are eligible. Self-employed and 1099 earners should call Angel Oak first to find the right loan from the start. Realtors should call us and learn more about Bank Statement mortgages for self-employed so they can start saying yes, instead of no.

How is income calculated?

When tax returns will not work, we accept personal or business bank statements to derive income. We can do a 12-month or 24-month look back. Income is determined upfront in the loan process and that is the income that will be used throughout the underwriting process. One thing that we look for is consistent income producing deposits. We default to a standard 50% expense ratio, although some businesses may require a 70% expense ratio. A licensed mortgage advisor can tell borrowers the expense ratio that will be used based on their circumstances. It is likely that a letter from a third-party CPA or tax preparer will be required. Personal bank statements can be used as well, and we use the same expense ratio as we do for business statements. Exceptions are possible and vary based on circumstances. As far as the types of income and whether gross or net income is used can be verified with your lender.

What are the loan requirements for a Bank Statement loan?

A self-employed or 1099 earner wanting a mortgage must be able to show that they have been self-employed for two years or more. Self-employed who are looking for a mortgage with less than two years still have loan options and should contact a licensed mortgage advisor to find out what they might be eligible to receive.  Other requirements include minimum credit scores, debt-to-income ratios, down payment and others. A licensed mortgage advisor will pull credit information and request other information to determine eligibility and detail exactly the income, credit scores, DTI and other ratios they will use. Angel Oak’s Bank Statement allows non-warrantable condos and only two years out of foreclosure, short sale, bankruptcy and deed-in-lieu. Fannie Mae and Freddie Mac do not accept non-warrantable condos and borrowers must be seven years out of credit events. Bank Statement loans allow flexibility that many borrowers need to qualify for a home loan.

What is the pre-approval process for self-employed borrowers?

The loan and pre-approval process for self-employed is not any different than for any other type of borrower. A self-employed borrower simply needs to complete an application or call a licensed mortgage advisor to start the process for pre-approval.

A pre-approval is an important step that gives a borrower a mortgage amount they know they can afford so they can find a home at or below that price level. As well, going through the steps of pre-approval speeds up the buying and loan process. Sellers take buyers with pre-approval letters more seriously and could help edge out the competition. It is always recommended to get a pre-approval, but can be especially helpful in competitive housing markets.

Here are the steps for any borrower to follow for a pre-approval:

Step 1

Call a lender and complete a home loan application.

Step 2

Document your income and assets. The lender will tell you exactly what these documents are including W-2s, tax returns, bank account statements, and any other necessary documentation.

Step 3

Pre-approval process. Everything submitted is verified and credit checks take place. Once that is complete, the borrower receives a letter stating what they are eligible to receive.

What is the best way to choose a lender?

Any homebuyer or borrower wanting to refinance their mortgage needs an experienced, full-service lender. Many homebuyers are turned away from local banks or other financial institutions because they don’t have the right loan options to fit their circumstances. A wide array of loan options is key. For self-employed borrowers, the best lender for them is one that offers both traditional and non-QM loans. If the borrower does not qualify for a traditional loan, the lender can simply pivot to another option that works upfront in the process without delaying the closing process. Angel Oak Home Loans is a full-service lender that offers a portfolio suite of non-QM options such as Bank Statement loans. As mentioned previously, Bank Statement loans are one of our most utilized loan products – because a significant number of self-employed borrower cannot qualify for a home without this loan. A self-employed or 1099 earner should always ask a lender if they have a Bank Statement loan. The next question? How many years of experience do you have in non-QM and how much non-QM volume have you originated? Angel Oak has been around for well over a decade and has originated over $15 billion in non-QM volume. Our success in non-QM speaks for itself! One thing we always encourage is for any homebuyer to call us just to have a conversation about their goals for homeownership – even if they aren’t ready right now. We have an advisory approach for everyone we work with and can help with a plan to achieve your goals whether it is right now or in the future.

The bottom line is that non-QM Bank Statement loans will always be in demand. This is because self-employed borrowers will always be in the market. In fact, the number of self-employed continues to grow as more and more people are starting their own businesses. These hard-working and credit-worthy potential borrowers will find a way to purchase a home. Angel Oak Home Loans is ready to make that happen and we hope more Realtors will realize the potential working specifically with self-employed clients.

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