4 Simple Ways to Verify Income for Self-Employed Borrowers

Recent figures reveal that an estimated 16 million Americans are self-employed, many of whom are hopeful homebuyers but may find it difficult to qualify for a mortgage without a more traditional W-2 income. What can you do to help them? Fortunately, combining bank statements with an additional source of information (or two), can be an alternative to verifying income for self-employed borrowers.

Here are four ways to verify income:

Option 1 – Unaudited profit-and-loss statement from a CPA or Enrolled Agent (EA).

Verus will allow an unaudited P&L prepared by a CPA along with two months of borrowers’ comingled or business bank statements. Additionally, the P&L could also be prepared by an IRS enrolled agent (EA) instead of a CPA, a more budget-friendly method.

Option 2 – A letter from the borrower’s CPA stating their average expense factor.

Another verification method to help a self-employed borrower is getting a letter from their CPA confirming their expense factor. It can be as simple as a statement like, “I’ve known Pete’s Plumbing business for the last seven years and on average his total expense factor is 40%.” That figure is then compared to the last 12- or 24-months-worth of bank statements to calculate the monthly income – total deposits multiplied by the expense ratio.  Note: both the borrower’s and CPA’s signatures must be included.

Option 3 – 3rd Party prepared P&L along with 12 or 24-months of business bank statements.

The borrower can provide a P&L prepared by their tax preparer or accountant.  The deposits from business bank statements are tallied and compared to the total sales on the P&L.  This validates the P&L and the net income reflected on the P&L is used for qualifying income.

Option 4 – 50% Net Margin along with 12 or 24-months of business bank statements.

If the borrower is in an eligible industry, the deposits from the business bank statements can be multiplied by a fixed 50% net margin to determine qualifying income.  No need to request any expense data from the borrower.

Offering multiple verification methods and options is key to successfully helping self-employed borrowers find a mortgage product that fits their needs. Check out VMC’s full range of programs here.

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How to respond to conditions

This short video will review how to respond to conditions pre and post close.

How to submit bank statements

Watch this short video for instructions on how to submit bank statements to Verus.

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