October 11th, 2017 11:50 AM by Gregg Mower
The Income Solving home loan has been designed to fill the gap for those folks that can’t qualify when they have to provide their Federal Income Tax Returns. Current rules for obtaining a Conventional or FHA loan require the applicant to provide tax returns to prove they make enough income to qualify for a home loan. This traditional style of qualifying for a home loan can leave an entire segment of the population out for qualifying for Conventional, or FHA and even VA home loans. So, the market place has come up with a type of loan that will comply with the current laws and allow for those that are self-employed or on commission to be able to qualify for a home loan without having to provide Federal Tax Returns. You may have even heard them advertised as Income Solving Mortgages.
The current law states that a borrower must be able to show “the ability to repay” the mortgage when applying for an owner-occupied home loan. This does not hold true for properties that are being purchased as a rental or for business purposes. So how have lenders come up with ways to avoid providing Federal Tax Returns? First, you may want to ask why not show the tax returns? The answer is simple as people that are self-employed or on commission don’t get the luxury of company expense accounts, paid health care, and other expenses. So those folks may make more than enough money to actually make the payments they just have to write off so many other expenses that a normal salaried person may not need to. This, in turn, lowers the income shown on their tax returns and, in some cases, may take them out of being able to qualify for a traditional home loan with their tax return.
The solution to being able to show “the ability to repay the loan” comes in the form of showing the actual income made by the individual. Showing the income can be best done by showing the deposits made to a business or personal bank account. For example; a borrower may show $300,000 in deposits for a year and yet their tax returns after expenses only show an income of $25,000. If we are allowed to look at the deposit record and apply the actual expenses of running their business their income would be far greater and probably enough to qualify for what they wish to purchase. So, to prove deposits we would require a borrower to bring in one or two years of bank statements to support their “ability to repay the loan”. We may also ask for a year-to-date profit and loss with the true income and expenses minus any paper write offs like depreciation.