If you own your own business or are a wage earner through gig work or another self-employment venture, we know that applying for a mortgage can be daunting. The bad news is, many lenders won’t qualify you for a traditional loan because you won’t be able to verify your income through a W-2 or pay stub like many borrowers can. The good news is that we’ve got solutions for you, included stated income as a self employed borrower.
We offer financing for borrowers who need a lender that is creative and strategic, like our stated income loans. Rather than qualifying based on your W-2 income, you can apply using your bank statements as income verification.
Since this is different from a typical mortgage application process, we’re here to help you figure out how to determine your stated income. You can contact us any time to learn more, or just keep reading for answers to some frequently asked questions.
What is a stated income loan?
Stated income loans are designed primarily for borrowers with non-traditional income sources. These loans are based on the income you report rather than verified through standard documentation. While they offer flexibility, they also require you to be honest and accurate about their earnings. For some borrowers, the primary challenge is not being willing to be honest, but getting accurate numbers.
How can I determine my accurate stated income for the loan application?
Because you can’t just turn in a W-2, you’ll need to do a little more homework. Begin by gathering your financial statements, including profit and loss statements, balance sheets, and bank statements. These documents provide a comprehensive overview of your business’s financial health and help you determine your average monthly and annual income.
Next, determine your gross and net income. Gross income is the total revenue your business generates before any expenses. Review your sales records, invoices, and contracts to calculate your gross income. This figure is crucial as it serves as the starting point for determining your net income.
To arrive at your net income, deduct your business expenses from your gross income. These expenses can include rent, utilities, supplies, salaries, and any other costs directly related to running your business. Accurate and detailed records of these expenses are essential for calculating your true income.
Once you’ve got these two figures, average your income. Since self-employment income can fluctuate, it’s helpful to average your income over a period, typically one to two years. This provides a more stable and reliable income figure for the loan application. Sum your monthly net incomes and divide by the number of months to find your average monthly income.
Remember, if any part of this process is overwhelming, we’re here to walk you through it.
How should I document my income for a stated income loan?
There are basically 5 types of documents you can use to show your income.
Profit & Loss Statement
Prepare a detailed profit and loss (P&L) statement. This document should clearly outline your revenues, expenses, and net income over a specified period. A well-prepared P&L statement not only helps in determining your income but also demonstrates your financial management skills to the lender.
Bank Statement
Provide bank statements that show consistent deposits from your business activities. Lenders often use bank statements to verify that the income you state aligns with your actual cash flow. It’s advisable to submit statements from the past six to twelve months.
Tax Returns
While stated income loans won’t require full tax return documentation, having your tax returns ready can support your income claims. Tax returns, especially those including Schedule C (Profit or Loss from Business), can corroborate the figures you provide in your P&L statement.
Invoices & Contracts
Gather invoices and contracts from clients to substantiate your income claims. These documents provide evidence of ongoing work and future income, showing your financial stability.
Business Licenses & Registrations
Include copies of your business licenses, registrations, and any other legal documents that validate your business operations. These documents help establish your credibility and legitimacy as a self-employed individual.
What else can I use to show my financial stability when I apply for a stated income loan?
In addition to the above documents, we might look at some other factors to determine how much you will qualify to borrow, including:
- A personal financial statement: You can create a personal financial statement that outlines your assets, liabilities, income, and expenses. This document gives us a comprehensive view of your overall financial situation, and helps us assess your ability to repay the loan.
- Credit report: Your credit report and score play a significant role in the approval process for a stated income loan. Before you apply, obtain a copy of your credit report, review it for errors, and address any discrepancies.
- Reserve funds: Demonstrate that you have reserve funds available. This shows us that you have a financial cushion in case of income fluctuations.
With the right approach, a stated income loan can provide the financial flexibility you need while accommodating the unique nature of self-employment. Ready to learn more or apply for a stated income loan? Reach out to us any time.
