I frequently get asked how applying for a loan as a self-employed borrower or an independent contractor is different than for a traditional full-time W2 employee.
First off, applying for a loan as a self-employed or independent contractor is not automatic, means to deny or not approve a loan application. We can do loans and frequently do for independent, self-employed borrowers.
However, applying for a loan and having an underwriter calculate income for a self-employed, independent contractor is different than a traditional W2 full time employee.
With a traditional W2 full time employee we collect pay stubs, W2 forms, and that typically spells out the income that the borrower makes. With an Independent or self-employed borrower, we collect tax returns as the primary documentation that we rely on to calculate qualifying income.
For most self-employed borrowers we collect two years of the most recent filed tax returns and look at those calculations to determine income. If a self-employed or independent contractor has been in business for five years or more then we may be able to get away with only providing the most recent year. Most independent contractors file a Schedule C and report all of the income and expenses for their independent contracting on that Schedule C.
Mortgage underwriters do not rely on the top line gross revenue, or gross receipts. They rely on the net income figure that’s reported on schedule C, with potentially a couple of modifications made depending on the type of expenses that are listed.
Are you self-employed or an independent contractor and want to explore your options? Contact me today and we’ll take it from there. Have a great one, thank you.