Navigating Mortgages for the Self-Employed

For self-employed individuals like hair dressers, contractors and real estate investors, securing a mortgage can sometimes feel like an uphill battle. Traditional lenders often rely on W-2s and pay stubs to assess income, leaving the self-employed with unique challenges. However, at Onshore Mortgage LLC., we understand the complexities that come with self-employment and our lenders offer specialized mortgage products to help you achieve your homeownership dreams.

Understanding the Challenges

Self-employed individuals often face a unique set of challenges when applying for a mortgage. Unlike traditional employees who receive regular paychecks and have standardized income documentation, self-employed borrowers typically experience greater income fluctuations, complex financial situations, and often have less straightforward documentation. Understanding these challenges is key to finding the right mortgage solution.

• Income Variability and Cash Flow: One of the primary challenges self-employed individuals face is income variability. Unlike a salaried employee with consistent monthly paychecks, self-employed borrowers might experience fluctuating income throughout the year. This variability can be due to seasonal business cycles, project-based work, or varying levels of client demand. For example, a freelance graphic designer might have months where income is abundant due to multiple high-paying projects, followed by quieter periods with minimal earnings. While this variability is normal for many self-employed individuals, it can make it difficult for traditional lenders to assess an applicant's ability to consistently make mortgage payments.
• Extensive Tax Deductions and Write-Offs: Self-employed borrowers often take advantage of various tax deductions and business write-offs to reduce their bottom line taxable income. While this is a smart financial strategy for minimizing taxes, it can inadvertently make it more challenging to qualify for a mortgage. Most banks and lenders typically calculate your income based on the adjusted gross income (AGI) reported on tax returns. However, after deductions and write-offs, the AGI may appear lower than the actual cash flow available to you on a monthly basis. For example, if you deduct business expenses like home office costs, vehicle expenses, or health insurance premiums, your AGI might be significantly reduced, making it seem like you earn less than you actually do. This can lead to a lower loan approval amount or, in some cases, a denial.
• Complex Financial Documentation: When applying for a mortgage, traditional employees usually only need to provide a few documents, such as W-2s, pay stubs, and bank statements. In contrast, self-employed borrowers often have to provide a more extensive range of documents to prove their income and financial stability. These purchase documents and refinance documents might include a profit and loss statements, business tax returns, 1099's or K1 forms.

Bank Statement loans: A Program Tailored for the Self-Employed

At Onshore Mortgage, we offer a range of bank statment only products that can make the mortgage process smoother and more accessible for self-employed individuals.

12 & 24-Month Personal Bank Statements

One of our most popular products for self-employed borrowers is the 12 or 24-month personal bank statement mortgage. Instead of relying on tax returns, we assess your income based on your personal bank statements over the past 12 or 24 months. This approach allows us to get a more accurate picture of your cash flow and financial health, making it easier for you to qualify for a mortgage. For this loan product Only transfers or deposits from the business account(s) are eligible deposits, except ATM deposits may be included if a consistent pattern is present. Any inconsistent or large deposits not justified must be backed out of the income calculation. To verify the income deposits, borrwers will need to provide their most recent two (2) months of BUSINESS bank statements which must reflect transfers to the personal account. Lastly, clients will also need to verify that they own 20% of the business by providing one of the following: CPA letter, Tax Preparer letter, operating agreement, or equivalent, reflecting the borrower’s ownership percentage.

12 & 24-Month Business Bank Statements

For those who keep their personal and business finances separate, we offer a similar option using 12 or 24 months of business bank statements. This product is ideal if your business generates a healthy revenue but your tax returns don't reflect your true income due to deductions and write-offs. By reviewing your business bank statements, we can help you secure a mortgage that aligns with your actual earning potential. Under this product we must verify that the borrower is at least 25% owner of the business by providing one of the following:o CPA letter, tax preparer letter, operating agreement, or equivalent reflecting the borrower’s ownership. Net income from the analysis of the business bank statements must be multiplied by the borrower’s ownership percentage to determine the qualifying income. Below are a few addional review factors:

• Expenses must be reasonable for the type of business.
• Monthy deposits should be reviewed for consistency.
• Deposits from alternative payment processing applications (i.e., Square, Venmo) are eligible.
• Inconsistent or large deposits need to be sourced or excluded from the analysis. The definition of a large deposit is any deposit exceeding 50% of the average monthly sales of the business.  

1099-Only Loans: Perfect for Commission-Based Workers and Independent Contractors

If you're a commission-only worker or an independent contractor who receives 1099 forms instead of W-2s, traditional mortgage qualification methods can be challenging. However, Onshore Mortgage offers 1099-only loans designed specifically for individuals in your situation.

Benefits of a 1099-Only Loan

• No Tax Returns Required: Instead of relying on tax returns, which may not accurately represent your income due to deductions, the 1099-only loan allows you to qualify based on your 1099 income statements alone.
• Simplified Documentation: With a 1099-only loan, the documentation process is streamlined. You simply provide your 1099 forms from the past 1-2 years, and we use that income to assess your ability to repay the loan.
• Flexible Income Verification: This loan product is ideal for those with fluctuating incomes, as it offers flexibility in how your income is calculated. It's a great option if your income is steady but not reflected in traditional tax documents.

DSCR Loans: A Game-Changer for Seasoned Real Estate Investors

If you're a seasoned investor with existing rental properties, the Debt Service Coverage Ratio (DSCR) loan is a product you should consider. A DSCR loan is designed specifically for real estate investors and is based on the cash flow generated by the property, rather than your personal income.

Benefits of a DSCR Loan

• Qualification Based on Property Cash Flow: Unlike traditional conventional mortgages, which focus on your personal income, a DSCR loan looks at the income generated by the rental property. This makes it easier for investors to qualify, especially if they have multiple properties. The market rent is determind by the rent listed on the appraisal
• No Personal Income Verification Required: Since the loan is based on the property's cash flow, you don’t need to provide personal income documentation, which simplifies the application process.
• Expand Your Portfolio: With a DSCR loan, you can continue to grow your real estate portfolio without the constraints of traditional mortgage qualifications.
• Flexible Loan Amounts: Our DSCR loan programs allow for loan amounts that range from $100,000 to 3.5 million. Loan-to-value can also be as high as 80%.

Why Onshore Mortgage, LLC?

At Onshore Mortgage, we pride ourselves on understanding the unique challenges that self-employed individuals and seasoned investors face. We are dedicated to finding the right mortgage solution for you, whether it's through personal or business bank statement loans or a DSCR loan for your investment properties. Everyone deserves the opportunity to own a home or expand their investment portfolio, regardless of their employment status. Let us help you navigate the mortgage process with confidence and ease. Contact Onshore Mortgage today to learn more about how our tailored mortgage products can help you on your journey to homeownership and beyond.