Guest Mortgage Expert Bruce David, Mortgage Banker at Clear Path Mortgage hosted by Bernie
Self-employed applicants should and can get mortgage-approved to start search for a primary, second/vacation or investment property. Know what to expect and have the right paperwork in order to achieve plan to purchase. Lenders now accept personal tax returns, business tax returns, bank statements or other third-party documents that provide reasonably reliable evidence of the consumer’s income or assets as proof of ability to repay the loan.
#1 Documents
Lender determines issuance of loan with thorough review of financial worthiness taking one of two routes. Traditionally, a self-employed applicant provides full documentation of at least 2 - 3 years of tax returns, 3 - 6 months reserves, cash for closing costs of 2 - 3% of purchase price, the business must show a profit as well as K-1 or W-2. Alternatively, applicant may instead provide limited documentation that is asset based of bank statements for last 12 to 24 months if the accounting method is to net down gross income against maximized expenses. This creative financing is an optimal way to qualify income for an asset based Non-QM loan.
While many loan applicants question or do not supply, all documents are required upfront to generate a Pre-Qualification or DU; this document is required to view properties that are residential and even to procure confidential listing information for multi-family properties. Once in contract most delays are due to not supplying documents on time; it is essential to submit updated and additionally requested documents to not jeopardize closing date nor loss of or per diems assessed against down payment.
#2 Underwriting
Aside from FICO score for credit worthiness, DTI, debt-to-income, ratio of percent net income applied to housing and debt is acceptably higher for the self-employed at maximum threshold of 50%.
Generally, down payment minimum is 10% primary home and 15% second/vacation home.
[4 Things You Should Know Buying in Miami]
A condo property must meet certain requirements and undergo an additional review process. To be warrantable for lender financing, the condo association documentation should reflect: 51% owner occupancy (an indication that monthly fees will be higher), at least 10% reserves, no pending litigation and adequate insurance.
While lenders may extend as low as 3% down payment for a condo as primary home, the association and/or owner may not accept and require more. Commonly, a condo requires down payment 30% without reserves, limited review 25%. [5 Things You Need to Know Buying a Condo in Miami]
#3 Interest Rate
With FICO score above 700:
Traditional (full documentation) — currently mid to high 3 percent or less interest rates.
Alternative (limited documentation) — currently 3.5 — 4.5 percent or higher interest rates.
Higher down payment will lower interest rate and mitigate lender risk.
#4 Investment
Loans can be secured for second/vacation home or income producing property that generate more than 110% of mortgage payment with:
—FICO score above 660
—limited documentation
—minimum 15% down payment, 30% or more less stringent to no review of documentation
Structure is an important upfront decision. Single or joint LLC, limited liability company, is good for self-employed and as an investor to protect against personal lawsuit. However, it waives homestead exemption. Plan for the purchase ensuring to file for the corporation before start of search.
Assignability should be disclosed in purchase contract.
A second/vacation home can be converted to an investment vehicle. A variety of financing vehicles are available; an interest only option to forego principal + interest instead of minimum out of pocket.
A condo hotel property of minimum 500 sq ft and with a full kitchen can either be placed in a rental program or be a residence purchased with lender financing 30% down payment. [11 Things You Should Know Buying a Condo Hotel in Miami]
Please contact me to discuss more.