Have the revenues from your business been solid over the past two years? Great! Well that’s not good enough to get a mortgage. Here are two main reasons:
- If you have been maximizing expenses in order to minimize your taxes payable, remember that it is the net (after expense) income from your business that is used by a lender to calculate your qualifying ratios
- If your projected income in the current year is lower than the income reported in your tax returns over the past two years, a conventional lender may decline your loan request outright
The Federal National Mortgage Association (Fannie Mae) publishes self-employment income guidelines for lenders. To qualify for a mortgage, your self-employed net income should be stable, predictable and “likely to continue”. While having guaranteed, contractual income is not a requirement, lenders carefully analyze the financial strength of your business, your sources of income, and the economic outlook for your industry.
Some suggestions to maximize loan approval probability:
- Understand how the lender calculates your debt-to-income (DTI) ratio – especially if your most recent tax return shows declining net income
- Produce a current year Profit and Loss Statement (P&L) showing year-to-date actual figures along with realistic projections for the remainder of the year
- Show that your company distributes less income than it earns (to demonstrate growing cash reserves)
- Ensure the new mortgage payment (for which you are applying) is in line with or lower than your current rent or the mortgage payment on your existing loan.
