For buyers curious about the USDA home loan program, they’ll find this 100% loan doesn’t require a down payment and carries some very competitive interest rates. The USDA loan is approved in much the same way as any other mortgage as it relates to credit, assets, and income. The lender will want to verify a minimum credit score and make sure you have enough cash readily available to take care of closing costs if needed. Keep in mind that USDA does permit home sellers to pay buyers closing costs. Lenders will also review the loan application to verify the borrower’s ability to repay the new mortgage along with any current monthly credit obligations. Credit and assets are validated with a credit report and credit scores along with recent copies of bank statements.
Lenders want to see at least two years of employment and will ask for paycheck stubs covering a 60 day period to document the ability to repay. Yet for those who are self-employed, there are no regular paycheck stubs and their income is intermitted – not exactly on the 1st and 15th of every month. If you’re self-employed and considering using a USDA loan to finance your next purchase, here’s what you can expect to provide your lender.
Just like someone who works for someone else, lenders want to see at least two years of self-employment. This is verified by providing the two most recent federal income tax returns, both personal and business. These two years of returns will also show annual net income for each year. The lender will verify an ability to repay by averaging those two years together and then divide by 24 to get a monthly amount.
For example, Year 1 the net income for the business is $100,000 and Year 2 the number is $110,000. Adding both together and dividing by 24 results in a monthly amount used for qualifying at $8,750. For a lender, the year-over-year consistency not only shows the business is established but the likelihood of a similar amount of income over the next few years is likely.
However, if the amounts are quite a bit different that can present some issues. Example being if Year 1 is $100,000 and Year 2 is $60,000 the lender could consider the business as failing and won’t approve the loan. Minor fluctuations from year to year are okay but bigger ones are not. A general rule of thumb is the income from one year to the next can’t decline by more than 20% although lenders are free to make their own determination. Lending guidelines ask the lender to determine the income, as well as the business, will continue for three years. While a lender can’t guarantee that length of time the lender can certainly conclude that based upon recent history the business will in fact continue.
Mortgage companies will also look at business bank statements to review monthly cash flow and compare the deposits to the income reported on the income tax returns and review personal bank statements to verify there are enough funds to take care of all closing costs associated with a USDA home loan. This is just some basic tips for self-employed borrower, for more information please contact above.
Be sure to also read about USDA household income limits here.