There are a handful of differences that make the mortgage approval process quite different for self-employed applicants and salaried employee applicants.
Stability of employment and income is a critical consideration for mortgage lenders; this is especially true for self-employed applicants.
When a salaried employee applies for a mortgage, the lender verifies employment through the listed company to ensure the applicants’ job status and income. Its purpose is to help the lender ascertain the likelihood of present and future employment. Verifying employment for the self-employed applicant is done through their public accountant, public listing, internet presence, and state business verifications.
When speaking with Lyons’ underwriters about the differences between the two, they strongly emphasized the importance of proving stability of income for self-employed borrowers to get approved.
The self-employed applicant has to submit more documentation about their income than the salaried employee. The last 2 years of 1040 income tax returns will be looked at. These will illustrate the applicants’ ability to grow their business, which also bodes well for the applicants’ chances for approval. Underwriters might request year-to-date profit and loss statements.
Another way lenders analyze the stability of income and employment is through tax filings.
For traditional employees, gross income is reported on the W2 tax form. Self-employed income is determined through the 1099 tax form, Schedule C, Schedule E, and corporate income taxes.
Ultimately, underwriting systems tailor documentation requirements for each loan scenario. The factors considered include the applicant’s overall credit, asset liquidity, and mortgage payment history. This is to say that applicants with a stellar credit history that can put down a larger down payment, or have large reserves after closing will typically be asked to provide less documentation.