Questions & Answers

Are self-employed borrowers qualified differently than salaried borrowers?

Self-employed borrowers are evaluated the same way salaried borrowers are—by determining if the borrower has sufficient income to support the mortgage payment and a willingness to repay all debt, evidenced by a credit report. However, the methods used in the analysis of the self-employed borrower's income are different.

In most cases, a salaried borrower's gross salary is used for qualification. This method is not adequate for the self-employed because the daily operation of the business must be supported by gross receipts along with income to the owner. This requires analyzing the borrower's federal tax returns and other schedules, depending on the type business, to determine net income to the borrower.

The growth, viability, and stability of the business field is also critical in determining the ability of the borrower to meet on-going obligations. The length of time self-employed and overall experience in the field must be considered. Because of the subjective nature of underwriting these loans, it is important for the borrower and the loan officer to put together a narrative along with documentation to support the income claim needed for the transaction.

What documents are required from the borrower?

The type of business structure will determine the documents needed. Documents needed for typical business structures are listed below.

Sole Proprietorship

• U.S. Federal 1040 with all applicable schedules attached
• Schedule C (Profit & Loss from Business)
• Schedule D (Capital Gains & Losses)
• Year-to-date Balance Sheet and Profit & Loss Statement

Partnerships (General and Limited)

• U.S. Federal 1040 with all applicable schedules attached
• Schedule E, Part II (Income or Loss from Partnerships)
• Schedule K-1 1065 (Partner's Share of Income, Credits, Deductions, etc.)
• Form 1065 (U.S. Partnership Return of Income) with all applicable schedules attached
• Year-to-date Profit & Loss Statement
• Partnership Agreement (may be required)

S Corporation

• U.S. Federal 1040 with all applicable schedules attached
• Schedule E, Part II (Income or Loss from S Corporations)
• Schedule K-1 1120S (Shareholders' Share of Income, Credits, Deductions, etc.)
• Form 1120S (U.S. Income Tax Return for an S Corporation)with all applicable schedules attached
• Year-to-date Profit & Loss Statement

Corporation

• U.S. Federal 1040 with all applicable schedules attached
• Form 1120 (U.S. Corporate Income Tax Return) with all applicable schedules attached
• Year-to-date Profit & Loss Statement