Loan Options for Self Employed in San Diego

Self-employed borrowers can have a difficult time applying for home loans these days in San Diego (and all of California for that matter).  The issue really comes down to income calculation.  Self-employed borrowers many times have years that are up and down for income or they may have years with lots of write-offs not showing much income.  W-2 salaried employers generally have an easier time obtaining a home loan because their income is steadier and they do not have as many write-offs.  But the good news is there are many solutions for self-employed borrowers to obtain a home loan today.

First let’s determine how a lender calculates income for a self-employed borrower:

  • The most important documents in a calculating a self-employed borrower’s income is their last two years federal tax returns.
  • The lender will take the NET taxable income (after all write-offs) off a borrowers tax return and average the last two years NET income to determine a borrowers income for loan qualification.
  • If the income is declining from one year to the next, the lender will just take the recent year and not do an average.  If the income has risen from one year to the next, the lender will do an average.
  • There are write-offs that can be added back to a borrower’s income.  Depreciation is the most common tax deduction that can be added back.  And there are other items that can be added back depending on the loan type; conventional, FHA, VA.  For conventional home loans, generally the deduction for business use of home can also be added back and some other write-offs as well.
  • If the borrower’s income declines by a very large amount from one year to the next, the lender may decline the loan due to severe declining income.
  • If a borrower files an extension on their tax returns, the lender will not require that years returns until October 15th of that year.  So for example if a borrower is applying for a loan in 2014, the lender would normally require the borrower’s 2012 and 2013 federal tax returns to determine their income.  However if a borrower files an extension, up until Oct 15th the borrower could use their 2011 and 2012 returns to qualify.

S Corporations and C Corporations

  • If a borrower operates as an S Corp or C Corp, the lender will determine the borrower’s income by what flows through to their personal returns.  All pages of last two years S or C Corp returns will be required as well as all pages of personal returns.

Borrower just moved from a W-2 job to being self-employed of a 1099 contractor

  • In this case a borrower will need to be self-employed for two years in order to apply for a loan
  • However I will offer some solutions around this below.  I will explain some options for borrowers where only one year of tax returns is required.

Next I want to talk about some of the options out there for self-employed borrowers having difficulty getting approved for a home loan.

Using only the most recent years tax return

A great option for borrowers who may have not shown much income the previous year is the option to use only one year of tax returns to apply for a loan.  This is very possible for a borrower who has 20% down payment using a conventional or jumbo loan.  This option is not possible for borrowers applying for less than 20% down conventional, FHA or VA home loans.  With a conventional home loan, the borrower is run though the desktop underwriter (DU) automated underwriting system.  And if the DU system comes back with a response only requiring one year’s tax returns, then the borrower is in luck and the lender will only need their most recent year filed return to determine income.

No income verification loans or “stated income” loans

A no income verification loan (NIV) is a loan where a borrower does not have to list their income on a loan application and the lender will not ask for any tax returns.  The lender will be evaluating the borrower solely on the basis of their credit score and cash reserve assets in the bank.  These home loans are now available again in San Diego and across the state of California, and are available even up to loan amounts in the millions.  The lender will usually require at least 20-30% down payment on these loans.

Stated income loans are home loans where a borrower will list their income on the loan application and the stated income will be used to approve the borrower for a home loan.  Like NIV loans, no tax returns or income documentation is required on these loans.

So for a self-employed borrower who does not want to have to provide their last two years tax returns, stated income and NIV home loans can be a viable option for purchase or refinancing options.

FHA, VA and other low down home loans

As mentioned above, any low down payment home loans (often used by first time home buyers) will require full last two years of tax returns for a borrower to qualify.  FHA loans only require 3.5% down and allow for very high debt-to-income requirements so they can be excellent options for self-employed even showing limited income.

Adding a co-borrower to qualify

Another option for a self-employed borrower who does not have sufficient income from their tax returns to qualify is to find a co-borrower.  A co-borrower does not have to live in the property.  Both FHA and conventional home loans allow for a “non-occupant” co-borrower  to go on the home loan to help a borrower meet the debt-to-income ratio requirements to qualify for a home loan.

So I hope that helps you better understand the options for qualifying for a home loan being a self-employed borrower in San Diego or anywhere in California.  Don’t hesitate to call or email me if you have any questions at all about qualifying for a home loan in California.

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FICO Makes Key Changes To Credit Scoring

Fair Issac Corp (FICO) made some recent key changes in how it will evaluate borrowers credit which will help certain borrowers attain better credit scores.

Fair Isaac Corp. FICO +0.15% said Thursday that it will stop including in its FICO credit-score calculations any record of a consumer failing to pay a bill if the bill has been paid or settled with a collection agency. The San Jose, Calif., company also will give less weight to unpaid medical bills that are with a collection agency.

As of July, about 64.3 million consumers in the U.S. had a medical collection on their credit report, according to data from credit bureau Experian. And of the 106.5 million consumers with a collection on their report, 9.4 million had no balance—and won’t be penalized under the new credit-score system.

More than half of all debt-collection activity on consumers’ credit reports comes from medical bills, according to the Federal Reserve. Such activity results in lower credit scores for consumers, meaning that lenders are more likely to be cautious in extending credit.

The impact of the changes on borrowers is likely to be significant. Accounts that are sent to collections, including credit-card debts and utility bills, can stay on borrowers’ credit reports for as long as seven years, even when their balance drops to zero, and can lower their scores by up to 100 points, said Mr. Ulzheimer.

The lower weight given to unpaid medical debt could increase some affected borrowers’ FICO scores by 25 points, said Mr. Sprauve

As noted in some of the excerpts from the WSJ article, many home loan borrowers today have some sort of medical collections whether paid or unpaid on their credit reports.  The fact that FICO will be giving less weight to this should help many VA, FHA and conventional borrowers earn better credit scores.   Additionally, the fact that FICO will stop penalizing borrowers for collection accounts that have already been paid will be a big plus for home loan applicants.   This is all great news for home loan applicants.


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VA Loans Are Best Loans Available Today

VA home loans are the very best available home loans anyone can get today.  They are a tremendous benefit for active military and veterans.  Below I list some of the factors that make VA home financing very unique and the best:

  • Zero down 100% financing: There is no other loan type (other than rural property USDA loans) that allow a borrower to finance 100% of the purchase price with no down payment.  This allows veterans and active military members to keep more cash in the bank as a cushion and as reserves.
  • VA 30 year fixed interest rates are the lowest: VA interest rates are lower than conventional home loan rates.  Even if a conventional borrower puts 20% down payment or more, they will not get an interest rate as low as VA loan offer.
  • VA loans only require a one year wait after prior short sale: Yes this is correct.  A veteran or active military member only has to wait one year after a prior short sale and they can apply for a VA home loan.  Conventional home loans even with 20% down now require a four year wait after a prior short sale. FHA home loans require a three year wait.
  • VA loans only require a two year wait after a prior foreclosure:   Again this is a great VA benefit.  Conventional home loans in comparison require a seven year wait after prior foreclosure.  FHA home loans require a three year wait.
  • VA home loans only require a two year wait after a prior Chapter 7 bankruptcy:  In comparison conventional loans require a four year wait after a prior bankruptcy even with 20% down payment.
  • VA loan do not have monthly mortgage insurance even with zero down: Conventional and FHA home loans have very high monthly mortgage insurance with low down payments.
  • VA eligible borrowers can get partial eligibility even if they have had a prior short sale or foreclosure with a prior VA loan.  Or if they own another property with a VA loan: Give us a call or email and we can check your current eligibility.
  • Veterans that receive disability pay are exempt from the funding fee on VA home loans: This is a huge benefit.  Even if a veteran has the minimum 10% disability they will still get the funding fee waived.
  • VA allows for zero down payment on very large jumbo sized home loans: You can get a zero down VA loan for very large amounts in many counties in California.  Here are some examples of California counties and the amounts you can go zero down up to.  Alameda County, Contra Costa County: $1,050,000. Los Angeles County: $687,500, Napa County: $592,250, Orange County: $687,500, Placer County: $474,950, Sacramento County: $474,950, San Diego County: $546,250, Santa Clara: $827,500, Santa Cruz County: $681,250, Sonoma County: $520,950, Ventura County: $598,000.  And with a very small down payment a VA borrower can go above these loan limits.
  • VA home loans allow for a borrower to do a cash-out refinance to 100% of their property value: There is no other loan today that will allow this.
  • VA lending offers an easy streamline refinance program to drop your payment to market rates if rates drop: This program requires no appraisal and no income documentation.   Conventional financing does not offer anything similar to this.
  • A VA borrower can be approved for a VA home loan without having perfect credit: In fact a borrower can apply for a VA home loan with a credit score in the 500’s and still get 100% financing.

So I hope this helps you understand the incredible niches of VA loans and why they are the best home loans available in the U.S. today.  Don’t hesitate to call or email if you have any questions about VA home loans.

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Stated Income Loans Available In San Diego

Stated income home loans are now available again in San Diego.  The term stated income refers to a borrower being allowed to “state” their income on a loan application and not have to document their income.  These home loans do not require paystubs or tax returns to document the income that is being stated on the loan application.  Stated income loans got a bad reputation before the housing crash in 2008 because they were abused and offered to low credit borrowers with low down payments.  This time around stated income home loans require higher credit scores, require borrowers to be self-employed and require larger down payments.

The good news is that the return of stated income home loans allows self-employed borrowers with complicated tax returns or uneven income the last few years to be able to buy a home or refinance their homes once again.  Below are some of the features of stated income loans:

  • Income is stated on the loan application but not verified
  • Loan amounts up to $2 million
  • Minimum credit score is 700
  • 30% down payment minimum
  • Cash out refinances available
  • Self-employed borrowers only
  • Primary residence or second homes only
  • One unit single-family or PUD only

So this is a great opportunity to be able to get back into home ownership or refinance your home if you are a self-employed borrower.

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