Are you Self Employed?

If you own 25% or more of any business you are then considered to be Self-Employed.

And as you know being self-employed allows you to reduce your taxable income by writing off many of your operating expenses. And the less taxes you pay- the better, right?

Some of the different Self-Employment types are Partnerships (businesses owned between 2 or more people), C-Corps (legal entity with shareholders) and S-Corps (combination of the two), Sole Proprietorship (100% individually owned) and Limited Liability (protected against personal financial loss beyond money invested).

Sometimes self employed borrowers that are not paid w-2 through the company have a difficult time proving monthly income. If you fall into this category talk to your mortgage broker about no doc, stated income and bank statement mortage loan programs.

Many self-employed consumers can not document enough income from their tax returns to qualify for a full income documentation mortgage. Therefore, they have to alternatively document their income or simply not document it at all. These types of loans with alternative income documentation carry a higher risk to a lender and therefore will normally come with a higher interest rate than a full income documentation loan.

In some cases, your mortgage professional may be able to obtain a reduced documentain loan for you without a higher interest rate. However, this type of program is only available for clients with a long and excellent credit history.

Self Employed borrowers seeking large loans are required to document their assets in significant detail. Programs are available to self employed borrowers whose assets are in their business name provided that they can verify that the assets are 100% in their control and that withdrawal of those assets would in no way impact or harm the operation of the business.

One of the major problem with lending to the self-employed is documenting an applicant's income to the lender's satisfaction. Mortgage applicants with jobs can provide lenders with pay stubs, and lenders can verify the information by contacting the employer. However, self-employed applicants have no third parties to verify such information thereby making it more difficult to obtain a loan.

The good news is that two government-sponsored enterprises, Fannie Mae and Freddie Mac, who purchase enormous numbers of home loans in the secondary market, have developed detailed guidelines for qualifying self-employed borrowers.

If you are self-employed, lenders have a more difficult time establishing your income that w-2 employees. Some self-employed borrowers use stated income loans to avoid this problem.

» DISCLAIMER: The information contained in this article on 'Are you Self Employed?' is a collection of contributions by licensed mortgage professionals and is not the opinion of Broker Outpost LLC. Always consult a licensed professional before applying for a mortgage.