Mortgages for Self-Employed Borrowers in CT

How underwriters look at self-employed income

Lenders treat you as self-employed when you own a quarter or more of the business that pays you. The underwriter's job is to find a stable, continuing monthly figure. For a conventional loan that means Fannie Mae's two-year history rule: two years of personal and business federal returns, or twelve months in some cases if you did the same work for similar pay before going out on your own.

Three things get the most attention. Trend: rising income is averaged over two years, falling income is taken at the lower recent year, and a steep drop can make it unusable. Stability: how long the business has existed and whether the work will continue. Liquidity: whether the business can keep paying you. The underwriter then builds a cash flow worksheet from the returns, adds back paper deductions, subtracts real ones and divides by 24. That figure, not your gross receipts or your deposits, goes into your debt-to-income ratio (DTI), the share of monthly income that goes to debt payments.

How write-offs lower the income you qualify with

Every deduction that lowers your tax bill lowers your qualifying income, with a few exceptions. On a Schedule C the underwriter starts from net profit, not gross: vehicle costs, supplies, contract labor, advertising and the home office all come off and stay off. Non-cash deductions are added back: depreciation, depletion, amortization and the depreciation share of the mileage rate, plus a documented one-time loss. S corporation and partnership owners are read from the K-1 and the business return; your W-2 wages from your own company count, distributions count if the business shows the income to support them, and business depreciation is added back in proportion to your ownership.

Conventional and FHA loans on two years of tax returns

If your returns support the income, a conventional or FHA loan is almost always the cheapest route, with the most lenders and the lowest down payment. Expect to provide:

• Two years of signed personal federal returns with all schedules, and business returns if you own 25 percent or more.
• A year-to-date profit and loss statement, often with two or three months of business bank statements.
• A signed IRS form so the lender can pull transcripts, and proof the business exists, such as a license or a Connecticut Secretary of the State certificate.
• On some files Fannie Mae accepts one year of returns, when the business is at least five years old and you have owned a quarter of it that whole time.

FHA uses the same two-year framework and is more forgiving on credit and a higher DTI; if your income is thin but steady and your score is in the 600s, FHA in Connecticut is often the answer before any alternative-documentation loan. If you are buying a rental, a DSCR loan skips your income entirely.

Bank statement loans: how bank statement lenders calculate income

A bank statement loan replaces tax returns with 12 or 24 months of your actual deposits. There are two flavors, and the difference matters.

• Personal statements. Deposits from the business into your personal account count close to in full, because the money has already cleared the business's expenses. You will need to show you own the business and that the deposits trace to it.
• Business statements. Deposits are gross receipts, so the lender applies an expense factor, an assumed share of each deposit that went to running the business. A consultant with no employees might get a small factor; a contractor with payroll and materials, or a restaurant, a large one. Many lenders default to roughly half unless a CPA or licensed tax preparer writes a letter stating the real expense ratio, which the lender then uses instead.

Bank statement lenders look at consistency more than the total: deposits in a pattern that matches the business, few overdrafts, no large transfers counted as income, and no sharp recent decline. Most want two years in business. Expect 10 to 20 percent down, a credit minimum in the 600s with better pricing above 700, reserves after closing, no mortgage insurance, and a cost above conventional. Twenty-four months usually prices better than twelve; if the last year was your strongest, twelve captures it.

1099 and profit-and-loss programs

Two cousins of the bank statement loan fill its gaps. A 1099-only program takes one or two years of 1099s from a few payers, applies an expense factor and uses the result as income, with no returns or statements. A profit-and-loss program takes a 12-month P&L prepared by a CPA or enrolled agent, sometimes with two or three months of statements to show the deposits line up; it suits owners whose books are clean but whose returns are tangled with other businesses. Both come from the same non-QM lenders, price close to bank statement loans, and the lender will check the preparer's license.

What a non-QM lender is and when you need one

A qualified mortgage, or QM, meets the federal Ability-to-Repay rule's safe harbor: standard income documentation, limits on points and fees, no interest-only or balloon features. Conventional, FHA, VA and USDA loans are QM. A non-QM lender still has to verify you can repay, but it can do so with bank statements, 1099s, a P&L, assets or a property's rent. Every bank statement loan is non-QM.

• You give up: pricing above conventional, a larger down payment, and a loan held or sold by the lender rather than Fannie Mae or Freddie Mac.
• You get: an approval that matches how the business runs, loan amounts above conforming, and a path to buy now rather than two tax years from now.
• Plan for: a refinance into a conventional loan once your returns show the income. Prepayment penalties on a primary residence are tightly limited by federal rules, and most non-QM lenders do not charge them on owner-occupied loans.

Which self-employed mortgage option fits, and what to send me

• Returns show enough income with a steady or rising trend: conventional or FHA.
• Returns show a loss but business deposits are healthy: a bank statement loan, personal or business depending on how you pay yourself.
• You work on 1099s and write off heavily: a 1099 program.
• Clean books, tangled returns: a P&L program.
• Buying a rental: a DSCR loan, where your income is not reviewed.

Connecticut's self-employed borrowers tend to be in the trades, restaurants, real estate, consulting and medicine, and the problems repeat. A plumber in Milford who banks through one personal account does better on a personal statement program. A restaurant owner in New Haven needs the CPA expense letter or a large factor eats the income. A physician in Fairfield County paid on 1099s from two practices is a clean 1099 file. Send me two years of returns if you have them, the last 12 months of the statements the business income runs through, your credit range and your down payment, and I will run the file both ways.