A standard requirement by virtually all lenders is for a borrower to provide their two most recent tax returns and a two-year history of employment in the same line of work. For salaried/W-2 borrowers, an underwriter can sometimes offer a bit of flexibility. For example: a borrower with a former self-employed position can usually qualify with income from a new, salaried position if it is in the same line of work and at a similar level of compensation. But self-employed borrowers are almost universally required to provide a two-year history of self-employment and tax returns for the two most recent years. This requirement is more stringently enforced with self-employed borrowers as a two year timeline is needed to assess their business's operating expenses and profitability.
But a good option can be found through some lenders who sell loans directly to Freddie Mac as they may be able to work with just one year's tax returns and a two-year history of self-employment. Working through Freddie Mac's Loan Prospector system, an underwriter can often secure an automated finding that allows for underwriting with less information, or even a higher debt-to-income ratio. A favorable finding is more likely when a borrower has other solid credentials such as high credit scores, substantial cash reserves, or is making a large down payment toward the purchase. This option can help self-employed buyers in a number of scenarios, including:
- A recently formed business with a two-year history, but only one year of filed returns.
- A newly formed business where the first year was a wash due to start-up costs, or a delayed initial income stream, but the business was profitable in the second (filed) year.
- A prior salaried work history changed to a self-employed business in the same line of work.
Competitive 30-year fixed loans can be offered on True Conforming (up to $417,000) and Super Conforming ($417,100 to $625,500) conventional loan products. Approval is based on Freddie Mac's automated LP findings and overall consideration (approval, loan amount, loan-to-value and debt ratios) is determined by the borrower's risk profile (FICO scores, asset reserves, etc.). If you are self-employed, and have been denied financing, there may be a solution.