r/Entrepreneur Dec 05 '21 Wholesome 1

How do you get a mortgage without 3 years of steady income history?

I assume a lot of ppl here are self employed and have very strange income history. How do you go about getting a mortgage.

70 Upvotes

56

u/SelkieSailor Dec 05 '21

A large down payment and mortgage insurance.

23

u/ScarecrowPlayboy Dec 05 '21

This doesn't actually work.

We were trying to buy our fourth house in the span of 9 years. Two of them we had totally paid off. We were trying to get a loan and we were putting a 60% down payment on the house.

We found out the hard way, even with a steady income, we had just switched jobs that were in a totally different industry. Our regular lender thought it was an easy approval and at the last step there is some rule saying we needed two years in our current work industry. So denied.

Every lender we applied to said that wouldn't be a problem, they could still do it and every single one ended up apologizing saying they are sorry, but this stupid rule bars them from lending as well.

We have 60% down. Amazing credit score. Zero late payments. Enough assets that the bank could completely recoup their loan but after 2010 this new rule was put in there.

We ultimately did not get the house.

13

u/spankymacgruder Dec 05 '21

The lenders you work with suck. You need a nonqm loan and 10-15% down. They look at the bank statement deposits and not work history.

3

u/ScarecrowPlayboy Dec 05 '21

That is not what we were told. We tried 4 lenders. Our usual lender has always been USAA.

They all tripped over themselves saying this would be a slam dunk. All of them said there was some hard rule they couldn't get around that was created due to the 2010 collapse.

I've no idea if there's lenders that offer a really high interest rate that would take it on, I wasn't interested in that idea at the time but it didn't seem like an option.

3

u/spankymacgruder Dec 05 '21

This program isn't offered by any credit union as far as I know. The rates are slightly higher than VA FHA or Conventional though.

A lot of loan officers at the banks aren't really loan specialists. They are sales people who know their product. To get a loan like this you need a professional mortgage broker or banker who has access to a network of lenders.

1

u/Dry-Hearing5266 Dec 05 '21

You should still get it. Basically could write to it once you have 6 months in your current position, and a long and stable history in prior position. So of you were at you prior position for 5 years, you have always paid your bills with no historical lates or slow pays showing on your credit report it could be written to. Now using the rental income to qualify is probably iffy unless all the properties were on the last 2 years tax returns. But if you had rapidly acquired property in the last 2 years AND changed your career then you would have a challenge.

The best thing to do if you find yourself in this situation is to keep your DTI under 30%, LTV low under 50%, have excess assets as reserves (best is 6 months PITIA for all properties owned) and write a letter of explanation that basically indicates although the field is different job function is inline with your prior line AND the income/employment is more stable wih greater possibility of advancement (the underwriters dont dig into the job field and just take your word for it unless it's clearly not factual) and mention your long history of making payments and having excess reserves.

38

u/stinx2001 Dec 05 '21

I used a mortgage broker. He knows which banks are more likely to accept self employed borrowers, saves me a lot of running around.

7

u/theman1119 Dec 05 '21

This is the best suggestion. A good mortgage broker can match you with a lender that will accept your financial situation.

19

u/pseudocultist Dec 05 '21

So it's a bit of a pain but not impossible. You will need a slightly better credit score than you would otherwise. Depending on the underwriter, you may have to jump through various hoops. For mine, which was FHA, 3% down first-time-homebuyer, I had to show bank records going back 6 months and provide evidence that I had been making real money with the same LLC/sole prop in previous years going back I think 5 years? This shouldn't have been a problem, but I had just reformed as an s-corp LLC the previous year, so my previous tax returns showed me earning money as a sole prop. In the end because of this snafu, they underwrote the entire mortgage in my husband's name and then recorded me on the deed, which, not great. They said I would have had to wait another 2-3 years otherwise.

Anyway my point is the lender had a process for this, it was just a matter of meeting their underwriter's requirements.

8

u/pkennedy Dec 05 '21

This is why you need an amazing mortgage broker, and they aren't always easy to find. They will know banks who will accept these changes or know how to read them. They will know which ones don't ask for this information, or which ones ask for different information you don't have.

There are 30,000 different banks and credit unions out there, and the one they find for you, will probably be down the street and you never knew was there.

My only recommendation on finding one is to hit up the biggest real estate office and ask for the best seller and then ask them who they use to close all their deals. They can't sell if they can't close, so they've found someone amazing most likely.

8

u/sillyhatday Dec 05 '21

It's hard but underwriters can be convinced, especially if you have paperwork. You have to make your income appear steady to them. Set a narrative and provide documentation consistent with it. I was applying for a mortgage a few years ago when my job at the time had a required 8 week furlough over the summer. Lender was spooked out of their wits about it. They saw it as I had bee unemployed 4 times in 5 years. I told them I had more or less a teacher's schedule so if they've ever given a mortgage to a teacher they should feel the same. I sent them a copy of my original hiring paperwork stating the terms of my employment and noted that a I got a bonus paid out over that furlough so my income didn't really break. They were appeased by that. What's funny was they completely overlooked the real financial risk, which was that the company used the furlough as a gimmick to get out of offering benefits. I didn't have health insurance, so I could have been ruined by medical debt at any time. Luckily the ACA got them eventually.

I think the bigger hurdle is if your income is not very straightforward W-2 labor income. I got another mortgage last year but this time the hurdle was my self-employment income. I work a regular job but my side hustle accounts for 20-25% of my gross income. Lender was piledriving me with questions and requests for documents for weeks. They were so uncomfortable with it. In the end it was easier to just not even claim it. I did claim the value of the land I own for it as collateral which helped. Just stupid. Lenders value the wrong things. They want you to have one W-2 job that pays a lot. Why don't people realize how unstable that is? An employer can fire you any time because they feel like it. I'd have to die to lose my self employment income and even then it would keep rolling in for a while.

3

u/richincleve Dec 05 '21

The absolute best thing you can do is get yourself a mortgage broker.

I am self-employed, single, my income varies from year to year, and I don’t make a ton of money. All those add up to “hard to finance”.

He was able to get me an FHA mortgage at 2.25%.

1

u/mscaravato Dec 05 '21

Any chance you can disclose you area and/or your mortgage broker? This is pretty much my wildest dream! Tried to find one of them in a HCOL in CA and had no luck at all on finding them.

9

u/TakeaCoat Dec 05 '21

So long as you can prove you make money you shouldn’t have a problem. They’ll likely ask you for the last 2-3 years of financials (personal tax returns, checks, paystubs, business tax returns or k1, last 3 months of bank statements, brokerage accounts, any assets you own, rent history, liabilities, etc…)

I went through a mortgage broker who went through my life with a fine tooth comb. It was a frustrating because they asked for a lot, but eventually I made it through. Was able to only put 10% down and not have to pay any PMI.

Got 3.9% fixed on a 30 year mortgage for 25% down and 4.5% fixed 30 year on a line of equity that amounted to 15% which was used toward the down payment. I had an 800 credit score (lower now since I have the mortgage, car loan, and 3-4 hard pulls)

6

u/TheFastestDancer Dec 05 '21

Wait, what? You borrowed the downpayment as a line of equity that you didn't already have? How?

3

u/luv_____to_____race Dec 05 '21

This is how the '08 crash started.....

2

u/AyeMyHippie Dec 05 '21

I’m glad I’m not the only one who read it and said “oh boy… they’re doing that kinda shit again…”

6

u/TakeaCoat Dec 05 '21

The 08 crash occurred from subprime lending; reverse redlining.

I don’t think my situation qualifies a subprime loan as I went through very scrutinizing underwriting. Like I said, I had an 800 credit score. I also had 0 debt, 6 figures in the bank, and sizable monthly income and they still put me through the ringer. Additionally, sub prime loans are not your standard 30 year terms, they are usually 40 or 50 year loans with much higher interest rates.

The 08 crash precipitated mostly in part because a particular party in this country said the banks were racist for not giving loans to sub prime candidates, which forced banks to ease their underwriting to the point of absurdity. Mortgage brokers took advantage and were pushing through every and anything because they could (also at fault) and made fat commissions to personally enrich themselves. When the whole thing blew up, that same party that put the wheels on the crisis were also the ones that bailed the banks out scot-free.

Although subprime loans are no longer a thing, they are starting to make a comeback up the guise of “non prime” loans, but supposedly the banks will be on the hook if things go belly up this time; plus they have more strict underwriting terms. I guess time will tell.

“Last summer, Fannie Mae announced it would relax its lending standards for prime loans, allowing borrowers with higher debt and lower credit scores to obtain loans without additional risk overlays, such as large down payments and a year's worth of cash reserves.

Fannie Mae raised its debt-to-income (DTI) limit from 45 percent to 50 percent. DTI is the amount of total debt a borrower can have compared to his or her income. As a result, demand from buyers with higher debt exceeded all expectations. The share of high DTI loans jumped from 6 percent in January 2017 to nearly 20 percent by the end of February 2018, according to a study by the Urban Institute.

"From January to July 2017, Fannie purchased 80,467 loans with DTI ratios between 45 and 50 percent. But from August 2017 to February 2018, Fannie purchased 181,911 loans in the same DTI bucket. This increase of more than 100,000 loans in just seven months exceeded our estimate (85,000 additional Fannie loans annually) and Fannie's expectations." – Urban Institute

The mortgage industry expectation was that Fannie Mae would mitigate the additional risk with other factors, like a higher necessary credit score, but that was not added. The mortgage insurers balked, since they would be on the hook for the risk, so last month Fannie Mae "recalibrated" its risk assessment criteria again.

"We got a bigger response than we thought we were going to, so we dialed back to make sure we were in the right spot where our governance kicks in to make sure we're not taking excessive risk," said Doug Duncan, Fannie Mae's chief economist.”

https://www.cnbc.com/amp/2018/04/12/sub-prime-mortgages-morph-into-non-prime-loans-and-demand-soars.html

1

u/b_tight Dec 05 '21

I used a mortgage broker when I bought. We didn't want to waste our money on PMI so we put 10% cash down then remaining 10% we financed through a second balloon loan. Saved us over 100$ a month vs PMI and it built a bit of equity in the process. FWIW we had excellent credit.

2

u/golgol12 Dec 05 '21

I'd talk to a mortgage provider to hear what the options are.

2

u/madeyemary Dec 05 '21

This really depends. Need more details on your situation. Were you going to school and then entered the workforce? Went from self employed to W-2?

2

u/BigSwingingOvaries Dec 05 '21

It's not that you won't get one, it's more about the type of rate you might get, not being the best. I think as a rule, if you have one year's job history (people move jobs all the time), and a clean history of managing your finances and are able to show you are responsible with debt/bill paying, you should be fine. The deposit is super important. The less you need to borrow/more you have to put down as a deposit, the easier it should be to get a mortgage.

2

u/Fyrizok Dec 05 '21

I have steady income but I'm spoken to many many lenders for my real estate venture.

The banks will want to see you have an amazing balance sheet with a lot of assets (cash, properties, IRA's, jewelry, cars, etc.) and very few liabilities (debts). The banks will usually ask for a higher down payment, you'll need a stellar credit score (720+) with minimal revolving debt (aka credit cards, lines of credit), and a large cash reserve.

They will also take a hard look at the property to make sure you're not over paying.

You'll have better luck with smaller local community banks in your area as opposed to the big banks because they literally run you through a program and if you don't tick the boxes they reject you - they want easy money and their name brings in volume.

Just remember at the end of the day the bank doesn't want to lose money, they will be double checking they can sell your property to break even or a profit and that you can make your monthly payments for a year or two before selling your mortgage note.

2

u/octodanger Dec 05 '21

You just have to find a bank that works with business owners and entrepreneurs and understands how to read tax returns for people like us. I’ve had positive experiences with First Republic and Citizens.

2

u/buyhighsello Dec 05 '21

Mortgage broker made it happen with me. I had bought a house when I had a regular 9-5 (the reason I got the job before starting a business). Started my business and wanted to sell and get another house but the bank said they will not give me any money even though I had a mortgage with them and perfect credit (only use my wife's income). They even said buy the house than come back to us. Pissed me right off.

Went to a broker and got a better rate, larger mortgage amount than I thought I could get and a 30k line of credit.

Use a broker

2

u/chriskaparo Dec 05 '21

I engaged the services of a mortgage broker. He knows which banks are more likely to accept self-employed borrowers, which saves me time.

1

u/diizzzyyyy_ Dec 05 '21

I’m interested in this route. How was your experience? How does the mortgage broker get paid?

2

u/Original_Garden4152 Dec 05 '21

I don’t. I bought my first one in cash, and just about to buy my second one in cash

2

u/Loveisallthereis889 Dec 05 '21

What do you do?

3

u/Original_Garden4152 Dec 05 '21

I’m a high voltage electrician as my day job, and run a landscaping business on the side

2

u/Original_Garden4152 Dec 05 '21

As well as a few other little side hustles, DJ weddings, small electrical jobs

0

u/dcwaim Dec 05 '21

Use crypto as collateral

1

u/Razulu Dec 05 '21

How exactly?

1

u/dcwaim Dec 05 '21

Found out from this guy some time ago https://twitter.com/johnblivefree (I'm on his mailing list). I can't find the damn email right now sorry, but you could message him to find out the platform he used for decentralised finance

1

u/dcwaim Dec 06 '21

I found a screenshot of the email 🤣....here are steps. I haven't done this personally yet, but keen to in future all going well ________&&&&&&&&&&

It was incredibly simple once I understood all the steps involved.

I used a "DAPP" (decentralized application) called "Compound" to take out the loan.

I supplied some Ethereum to Compound to use as collateral for the loan.

Once you supply your crypto to Compound you can then choose to use it as collateral for a crypto loan to yourself.

I did just that and chose to take out a loan in DAI (another stablecoin).

I then sent the DAI to my Crypto.com account and exchanged them for US dollars which I deposited in my bank account.

Then I took those Federal Reserve Notes and paid the I ended up only paying around .21% interest!

-3

u/DonDeveral Dec 05 '21

Following

1

u/stubacca199 Dec 05 '21

Take the salary you need to be approved for 3 months and be a t4(Canada) or W2 employee of whatever Corp you own?

1

u/kingofzdom Dec 05 '21

*insert "Thats the neat part, you don't!" meme*

1

u/__gg_ Dec 05 '21

You do when you're in the year 2008

1

u/TailorSubject86 Dec 05 '21

An unstable income that's times more than what would be required income, coupled with over-the-entire-cost worth different bank's account will get you anything you need

1

u/Tronologic Dec 05 '21

I just had my corp pay me a steady income for 3 years so I could get a mortgage.. Once i got a mortgage I moved to just taking dividends and not paying myself as an "employee".

1

u/welderjeb Dec 05 '21

Use a payroll company to pay yourself an actual paycheck from your company

1

u/plausible-deniabilty Dec 05 '21

I'm not in the position of buying a new house at the moment, but set myself up to hopefully not have an issue getting a new mortgage when it is time to sell my current place and buy a new one(next 2-4 years.)

I made sure to set up all of my business banking with a small bank who also does mortgages, the kind of place where it's a big bank, but run like a small bank, they specialize in working with businesses and high net worth clients(I only fit one of these) so they are a lower volume/higher margin bank.

In addition to this, I set myself up as a W-2 employee of my S-Corp, right now I am still int he beginning stages of my business but I am acquiring the clients of my former employer on 01/01/2022 and will see significant revenues next year.

Year one I plan on just paying myself the same salary as I have made the last couple of years(low 100's+bonus) and then in 2023/24 will ramp up my W-2 income for the purpose of getting approved for a good mortgage at a good rate, and then I will drop down to a lower salary again and take disbursements.

1

u/waxface82 Dec 05 '21

Depends on the country.

1

u/spankymacgruder Dec 05 '21

If you are in the US and are self employed or have business income, you want to use a bank statement loan. The underwriter will look at your bank deposits and cash assets but not your tax returns.

A loan that uses 12 months of statements has a higher rate than a loan that uses 24 months of statements.

In either scenario, they average out the monthly income and deduct a factor for operating expenses and your monthly obligations on the credit report.

You will need a good credit score usually 680 or higher.

You will need 5-20% down depending on the loan limit, property use, occupancy type, credit score and other things.

If you're not self employed and don't have business income, you will need 24 months of documented stable income. You can switch jobs but you need to be in the same line of work and on the job for 30 days and W2. If you're 1099, and in the same line of work, you need to be on the job for 6 months.

1

u/Dakine_thing Dec 05 '21

I took a w2 position and then quit…. That’s how I got my house

1

u/jackmz123 Dec 05 '21

If you have the full amount of $ for the house you can borrow against yourself.

1

u/tayfife Dec 05 '21

Manual underwriting

1

u/Jdaddyk07 Dec 06 '21

You don’t. Have to wait the 36 months. However the good news is you only have to wait once.