The absence of Form W-2 tax forms is a problem often faced by the self-employed when applying for a mortgage. Form W-2 is used to verify income, a hallmark loan qualification requirement. Still, self-employed borrowers can consider a subprime mortgage as a possible alternative to traditional mortgage financing.
Subprime Mortgages for Whom?
Credit rating aside, borrowers can fall into the subprime category if they can’t (or sometimes don’t) prove their assets or income. They can be:
- Self-employed people – small business owners, contractors, etc.
- People who have strong cash flows but write off a lot of business expenses to reduce taxable income on tax returns.
Nevertheless, today’s tougher mortgage rules such as the ability-to-repay standard seem to build a case in favor of self-employed borrowers who can repay but sometimes fall short in documents.
Subprime Mortgage Options
Here are some mortgage financing options available for self-employed people, that may or may not require documentation to prove income:
- No documentation loans: With this type of loans, lenders don’t verify the income information. If your tax returns show losses or low profits, a no doc loan may be a good option.
- Low documentation loans: Also known as Stated Income/Stated Asset Mortgages (SISA). Lenders may not verify how much you make but they may look into your sources of income. Thus, prepare to provide a list of clients, sources of cash flow, e.g. investments or an IRS Form 4506.
Looking for worthwhile deals on subprime mortgage loans?
Full documentation loans: If you are able to prove your income and can submit additional paperwork about your business, including tax returns, licenses, profit and loss statements, balance sheets, then a full-doc loan is for you.
Asset-based loans: If you have substantial assets like bonds, stocks, and 401ks that can be liquidated easily, you could qualify for an asset-based mortgage.
Self-Employed Mortgage Application Checklist
If you’re self-employed and want to improve your chances of getting a mortgage loan, here’s what you can do:
- Prepare your credit score, which may be 680 or 620 as it varies.
- Prepare to put a down payment of between 20% and 30%.
- Prepare to produce statements on bank deposits (good for two years) to prove your earning capacity and assets that can be easily liquidated for a year’s worth of mortgage payments.
- Prepare to pay a relatively higher rate.
- Prepare to wait for the loan to close.
- Prepare to enlist the help of a co-signer or co-borrower who has a W-2, if it comes to that.
You see, being self-employed will not stop you from getting a good mortgage loan. Prove to your lender that you make a good borrower and your mortgage application might just be approved.