Deducting business expenses from your earnings: It’s a must when you’re self-employed. Otherwise, your annual income tax bill might put you out of business.
But this common practice can hurt your mortgage eligibility. The lender will base your borrowing power on your earnings after you’ve written off expenses. So, if you earned $150,000 and wrote off $50,000 in expenses, the lender will think you earned only $100,000.
Showing a lower income on paper could spoil your mortgage application. Fortunately, lenders now offer better ways to get around this hurdle and qualify with your actual income.
Start your no-tax-return loan here.What’s in this article?
Bank Statement Loans
Rather than asking for your tax returns, and recording their lower taxable income, some lenders can use your bank statements to measure your actual income.
Expect to submit 12 to 24 months worth of bank statements, and know that you’ll likely pay a higher interest rate because bank statements loans create more risk for lenders. But a lot of borrowers don’t mind paying a higher rate in exchange for getting a better way to measure their income.
With these loans you could still qualify with a credit score as low as 620, but you’d probably need to make a larger down payment. If you’d like to put as little as 10% to 15% down, it’s best to have a credit score of 720.
- Down payment requirement: 10% to 25%
- Credit score: 620 to 720
- Occupancy: Primary residence, second home, or non-owner-occupied
- Loan type: Purchase, refinance, cash-out refinance
- Maximum loan: Varies by lender; up to $5 million
- Ownership entity: Personal or LLC
DSCR Loans
DSCR loans bypass income verification altogether. Instead of checking tax returns or bank statements, underwriters count the rental income you’ll be earning from the property you’re buying.
For example, if you’ll earn $1,000 a month in rent from the property you’re buying, a DSCR lender could approve a loan with a monthly payment of $800 — or possibly even $1,000 in some cases.
These loans require higher down payments and charge higher interest rates. They won’t finance a primary residence; only investment properties.
- Down payment requirement: 20% to 25% or higher in some cases
- Credit score: 640 or higher
- Occupancy: Non-owner-occupied only
- Loan type: Purchase, refinance, cash-out refinance
- Maximum loan: Varies by lender; up to $5 million
- Ownership entity: Personal or LLC
Hard Money Loans
When you apply for a hard money loan, the lender may ask for your tax returns, but it’ll interpret the numbers differently than a traditional lender would. Hard money lenders understand the financial nuances of real estate investing. You’ll have a better chance of getting approved even if your taxable income is lower than your real income.
In exchange for easy and fast approval, borrowers pay higher interest rates and higher down payments. Lenders may also want you to have some real estate investing experience. And, most hard money loans must be repaid within three years.
If you need temporary financing for a fix-and-flip — or until you can make arrangements for a permanent mortgage — a hard money loan can do the job.
- Down payment requirement: 20% to 30%
- Credit score: 580 or higher
- Occupancy: Non-owner-occupied and owner-occupied
- Loan type: Purchase, refinance, cash-out refinance
- Maximum loan: Varies by lender
- Ownership entity: Personal or LLC
1099 Mortgage
IRS 1099 forms show your pre-tax income. So when lenders check 1099 forms, instead of your 1040 tax return, they’ll typically record a higher income and can approve a bigger mortgage.
A 1099 mortgage can be harder to find than a bank statement loan, and you’d still have to submit bank statements to show what you’ve earned so far in the current year.
As with a bank statement loan, expect to pay a higher interest rate and a bigger down payment when compared with a conventional loan.
- Down payment requirement: 10% to 20%
- Credit score: 660 or higher
- Occupancy: Primary residence, second home, investment
- Loan type: Purchase, refinance, cash-out refinance
- Maximum loan: Varies by lender; up to $3 million
- Ownership entity: Personal or LLC
Learn more about alternative lending solutions.
Non-QM Asset Depletion Loan
Income isn’t the only way to measure a borrower’s ability to repay a mortgage. For example, some borrowers own a lot of assets but earn little, if any, annual income.
In this case an asset-depletion loan can help. Underwriters measure your total liquid assets and divide that value by the number of months in the loan term. If this calculation shows you have enough wealth to make all the payments — and pay your other living expenses, too — the lender can approve the loan.
Non-QM asset depletion loans offer more flexible terms than conventional asset depletion loans, but they also tend to have higher interest rates.
- Down payment requirement: 25% to 35%
- Credit score: 680 to 720
- Occupancy: Typically non-owner-occupied only
- Loan type: Purchase, refinance, cash-out refinance
- Maximum loan: Vaires by lender; often $1 million
- Ownership entity: Personal or LLC
Conventional Asset Depletion
Conventional loans backed by Fannie Mae and Freddie Mac allow asset depletion for income verification, too. But they also have more restrictions than non-QM asset depletion loans.
For Fannie Mae loans, only employment-related assets are acceptable. This usually means money saved for retirement in an IRA, 401(k), or an equivalent retirement account. For Freddie Mac loans, any asset you fully own will work.
- Down payment requirement: 25% to 30%
- Credit score: 620
- Occupancy: Primary residence or second home only
- Loan type: Purchase and no-cash-out refinance
- Maximum loan: $726,200 in most areas
- Ownership entity: Personal
Standard Conventional
Standard conventional loans aren’t automatically off limits for self-employed borrowers. If your taxable income is still plenty big enough to qualify for the loan you need, a conventional loan should work well.
Also, if you’re self-employed but you also have a job that provides W2s and pay stubs, you don’t have to report your self-employment income at all. This is assuming you don’t need the self-employment income to qualify for the loan.
- Down payment requirement: 3-25%
- Credit score: 620
- Occupancy: Owner-occupied, second home, or non-owner-occupied
- Loan type: Purchase
- Maximum loan: $726,200 in most areas
- Ownership entity: Personal
Self-Directed IRA Real Estate loan
If you have a self-directed IRA, you could direct its savings toward an investment property. Basically, instead of investing your retirement savings into stocks, bonds, and mutual funds, you’d be investing in real estate.
Your IRA’s savings would need to cover 30% to 40% of the rental home’s purchase price. The remaining balance would come from a non-recourse real estate loan, one that’s secured by the rental income you’d earn from the new home — and one that’s made to your IRA, not you.
As a result, the loan wouldn’t base your eligibility on your personal finances.
- Down payment requirement: 30% to 40% (from IRA funds)
- Credit score: N/A
- Occupancy: Non-owner-occupied only
- Loan type: Purchase
- Maximum loan: Based on size of IRA
- Ownership entity: Personal or LLC
Cash Flow Based Financing
New non-mortgage options are coming online for real estate investors, such as cash flow-based financing. These lenders look at your portfolio cash flow — not just your income from one property — and can advance funds to help you grow your business.
Existing investors can use these loans to help make down payments on new properties or to renovate an existing investment property.
Keep in mind that lenders will need to look closely at your books to make sure your entire business’s cash flow is healthy enough to support the loan.
Finding Your Way to Report Your Accurate Income
When your tax returns don’t reflect your actual income, traditional lenders can think you earn less than you do. They might base your maximum loan size on inaccurately low numbers.
That’s OK. With so many non-traditional types of loans in today’s market, you can find a way around this obstacle.
The key is to find the method that best meets your specific needs.
Submit your no-tax-return mortgage scenario.Our advise is based on experience in the mortgage industry and we are dedicated to helping you achieve your goal of owning a home. We may receive compensation from partner banks when you view mortgage rates listed on our website.
