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.