Transcription
If you're self-employed and think getting a mortgage without tax returns is impossible, we think again. Hi, I'm Scott Hastings. I consider myself a self-employed mortgage expert, and in this video, I'm going to break down exactly how you can qualify for a mortgage without showing traditional tax returns, step by step. So, whether you're a business owner, a freelancer, or a 1099 worker, I'm going to show you how to navigate the process and get a house. So, let's dive in.
So, first, why are tax returns a roadblock? Well, lenders for traditional type mortgages, like Fanny Mae, Freddy Mac, FHA, you've probably heard of those, um, they're government-backed mortgages. You know what they use to determine, uh, someone's income if they're not a salaried worker or a W2 worker? I would say, um, if they're self-employed, it's going to be their last two years of tax returns. Um, now, the problem, of course, is that as a business owner, you're going to take advantage of the tax laws and you're going to write off as many, uh, business-related items as possible to lower your taxable income. Well, the problem with that is what you're also doing is lowering the amount of income that the mortgage company can use to qualify you for. So, for example, if you bring in, for easy math, $100,000 in gross revenues, but you have $50, $60,000 in expenses, well, then you're only going to have $40,000 in income to be used for a mortgage.
Well, the good news is there are other ways to qualify without using tax returns at all. As a matter of fact, they do not want to see your tax returns and really can't see your tax returns. So, what are some different alternative income documentation methods? Well, the first and most popular is going to be bank statement loans. Um, I would say the majority of the loans that I do are going to be bank statement loans. Typically, I use the last 12 months of business bank statements. Um, you can use 24 months, sometimes the rate will be slightly better. I mean, when I say slight, I mean really slightly better. Um, so sometimes it's just easier to use 12 months. Um, also, your, um, definitely if your last 12 months have had more income, then you only want to use your last 12 months because they're going to take an average. Um, so what you have to have is, you know, obviously stable deposits, minimal, and this is key, non-sufficient funds fees. Most lenders will only allow you to have maybe six NSF fees. So, in other words, those times that you've accidentally overdrawn your account, if you show more than six in a 12-month period, that's well, not a good sign. Um, so definitely keep, uh, those returns from, you know, going into a NSF status.
We also can use personal bank statements. So, what I usually do is first look at the business bank statements, that's where most of the income is going to come from. But let's say you're a smaller business, maybe you're a solopreneur, and you have a business bank account, but you find that most of the deposits are just transferred over into your personal bank account. Well, then we can use 12 months of your personal bank statements. And the good thing about that is we can use 100% of the deposits on the business bank statements. I forgot to mention, you're only able to use 50% of the deposits as income, sometimes up to 70%, depending on what type of business you have.
Another option, I've actually done a lot of these in the last 12 months, is for 1099 income. So, if you're a 1099, you receive a 1099 for your work at the end of the year, maybe you get multiple 1099s, that's just the nature of your work. Well, we can use 90% of the 1099 as income. So that's very straightforward, you know, really very easy to do. Um, um, so those are, you know, if you're a realtor, for example, you're going to get a 1099, lots of jobs like that.
And then finally, we're going to have no income verification loans. I shouldn't say finally, but the next most popular is no income verification loans. I've done quite a few of those this year. So, there's a few lenders left in America where you truly don't list any income on the application. Typically, you're going to need to have 25% down payment, you're going to have to have six to nine months of mortgage payments and reserves after closing. Um, but if you have good credit, say a 680 plus credit score, then you can do a true no income verification loan. You can also do this for a cash-out refinance. So, that's another popular program.
Another program is an asset-based loan. So, an asset-based loan is where, um, you don't have to pledge your assets, but you, let's say you have, just for easy math, a million dollars in your retirement account. Well, then you're showing plenty of assets to qualify for the loan. So that's another, um, another type of alternative income documentation loan.
So, the next thing are, you know, credit requirements. I mean, obviously, you're going to have to have good credit, uh, to qualify for any mortgage, but particularly for an alternative income documentation type loan. The minimum credit score is going to be 620, and if you have a 620 score, you're probably going to have to put at least 30% down, um, maybe even 35% down, and of course, the rate is going to be a lot higher. Um, but if you have a 680, 700 score, you can probably put down as little as 10%. Um, and that's really the minimum down payment is 10% for any of these types of loans. So that's something to definitely keep in mind.
Something that I, I come across semi-frequently are trade line requirements. So, this is really important. So, a trade line is like a credit card or a car loan. It's a line item on your credit report. So, a lot of times, or sometimes I see people that just don't have enough open trade lines. So, in general, you're going to have to have three open trade lines reporting. For, when I say reporting, they've been open for at least 12 months and showing activity. Um, if you don't have three, sometimes you can have two trade lines, but they're going to have to be open longer, probably two years, 24 months. Or if you have one trade line and it's been open for at least three years, that's, you know, probably going to be enough. But definitely make sure that you aren't, you know, working on just a cash basis. You definitely need credit.
So, a few notes on just all these types of loans. I think I mentioned a minute ago, you need to have at least a 10% down payment. 15% is going to be better. I noticed that there's a big rate difference between a 10% down payment and a 15% down payment. I was looking at one today, it's actually was a difference of a whole percentage point, so that's a big, uh, thing. You're also going to want to have or need to have cash reserves. So, that's money in some sort of account after closing. It could be a retirement account, could be, um, just a bank account. Um, but the lender wants to see that you're able to make probably at least six months of mortgage payments after closing. Um, and then you just want to make sure that you, uh, again, have clean bank statements. What we want to see is the best is to see just straight deposits. So, you can't use, uh, transfers. So, if you have transfers from one account to another, unless it's, you're using personal bank statements and you're transferring from the business account to the personal account, you're not able to use those deposits. So, for example, if you're depositing money from the personal account into the business account, you wouldn't be able to use that as a transfer. Also, you have to go through and make sure things like, um, returns at stores, you know, sort deposits that aren't, um, sales, uh, cannot be used. So, you want to make sure that's, um, uh, you know, up to date. And you also want to make sure that you're not changing bank accounts a lot or changing banks. Uh, it just makes it hard to document. So, it'd be nice if you have been with the same bank for at least 12 months and, you know, you don't have a lot of NSFs, non-sufficient funds, etc.
So, I would say what you want to do is start preparing now. You want to reach out to a mortgage broker like myself and have them look through your bank statements, do the income calculations, um, make sure that you qualify, see how many months, uh, of bank statements you can use, see, um, what percentage of the deposits you can use according to your business. So, for example, if you're a car dealership, you're only going to be able to use 50% of your deposits because you have a lot of overhead. But if you're, let's say, um, a consultant and you're just working from home, you probably be able to use 70, maybe even 80% of the deposits because you, that your business, you don't have a lot of overhead.
So, I've got a lot of, you know, work with a lot of people, have a lot of, you know, success stories. Um, uh, had worked with a client earlier this year, she's a race car driver, buy her first home. She just wasn't showing enough money, had obviously, as a race car driver, had a lot of write-offs. But what we're able to do is use 12 months of her business bank statements, got her into her first home.
And then also, I, I also look at every, I also want to see everybody's tax returns and do the income calculation before we say yes, you're going to have to do a, um, alternative documentation loan. Because a lot of times, maybe you've talked to a bank, or credit union, or somebody that just didn't do the income calculations right from your tax returns, or just didn't know the guidelines or know how to maneuver. So, I've had quite a few clients, uh, especially this year, who thought they couldn't qualify or had been told they couldn't qualify for a traditional loan, but I was able to find a way using their tax returns, maybe move some things around and get it to work. So, everybody's story is unique.
Um, um, definitely make sure you reach out to a mortgage broker. Um, if you found this video helpful, please click like and subscribe. That would help me out a lot. If you have a scenario, if you'd like to talk to me about your particular situation, go to my website, mortgages by Scott dot com, or, uh, you can reach out to me at 704-897-168. And please share this video, uh, if you found it helpful and subscribe to the channel. All right, Scott Hastings again, try to be a self-employed mortgage expert. Thanks for watching.