Our military personnel put their lives on the line defending our country and our freedom. And with the recent bill in Congress passing, there’s now no cap on how much you can borrow with a VA Loan. We love being able to help our heroes get into a home. However, how do you get a VA Loan if self-employed?
Since 72% of the US military is made up of people from the millennial generation, a large percentage of the current US Military has grown up in an era of widespread internet use. It’s no surprise that when they rotate out of service, they aren’t willing to join in on the traditional rat-race. Instead, many are opting for a self-employment option.
What Does it Mean to be Self-Employed?
When you do the work and pay yourself, you’re self-employed. If you receive your paycheck from another company or business, you are not self-employed. Self-employment includes freelancing, independent contractors or 1099 workers, sole proprietorships, and direct sales.
How To Get a VA Loan When You’re Self-Employed
There are a few ways to prove your income when self-employed. Let’s go over those.
Proof of Income
A mortgage lender will want to see at least two years of your income to establish any patterns in pay. Two years of income will ensure that lending to you will be an acceptable risk.
Some of the things they’ll ask to see are:
Tax returns for the last two years. Your tax returns will show your overall net taxable income for each of the past two years that would be considered net personal income.
YTD Profit and Loss Statements for the current year. This is to show the underwriters your business’s current financial net revenue, where past returns show past income of the business. Mostly, they are looking to see that the company is tracking as good or better than the previous two years. To determine what income to qualify the borrower for.
Bank Statements for the last two months. If you need funds at the closing of the loan, then the loan will require bank statements to document the funds are available for closing. (Not uncommon for some buyers to accumulate funds from gifts and paychecks in the early process of underwriting, to gather the necessary amount of funds needed.)
DD214 Long Form or Military ID. These documents will be used in the pre-qualification stage, to secure your Eligibility Certificate to determine your eligibility for the loan.
Getting Your Bank Statements and P&L’s
This is probably the easiest step in the process. Your lender will want to see two months of bank statements. If you don’t have ready access to them through online banking, you can contact your bank, and they’ll be able to provide them for you.
Your bookkeeper (or bookkeeping software) will have the ability to provide you with the business profit and loss statements that your lender will want to review. If you have any questions on what exactly they need to see, your lender is your partner in this and will help to make this process successful.
Getting a Mortgage Loan
The process for a home loan, VA or otherwise, can take some time. And we know people often wonder how to get a VA Loan when self-employed. From application to funding can take anywhere from 30-60 days, sometimes longer. Follow the instructions your lender provides because some actions can send up red flags to an underwriter.
Mind Your Credit
Don’t apply or take out any new forms of credit, this includes buying furniture on credit, buying a new car, or spending a large chunk of the money in your bank. However, it is perfectly fine to make multiple credit inquiries for the purpose of shopping for a mortgage, to find the best lender for your needs.
All mortgage inquiries on your credit, from the day of the 1st credit check, count as one credit inquiry if they were all pulled in 30 days. Meaning, they won’t affect your credit negatively to check around.
Moving Around
Don’t add a large chunk of inconsistent cash to any accounts if you can’t prove where you got it, make sure you have a paper trail — meaning, no large cash deposits, without consulting your mortgage advisor.
Checks and direct business to business transfer for payment to your business are fine, as they are easily paper-trailed.
Try not to co-mingle personal funds with business funds. If there is a lot of activity, where personal funds are funding the business, within the supplied bank statements, an underwriter may perceive that the company isn’t as healthy as the P&L represents.
However, it’s not uncommon for a business owner to utilize business reserves to fund cash requirements for closing if their account is short. Please discuss with your mortgage advisor about this possibility, as it may require a formal explanation and restrictions.
Be Patient and Don’t Panic
The whole process is contingent on a lot of moving parts. The process will have a lot of back and forth, but your lender will fight your corner with you to get the job done.
Don’t Make Assumptions
Of the approximately 20.4 million active duty or retired veterans that qualify for a VA loan, only 611,000 received one in 2018. That means that only .003% of eligible people took advantage of this program.
Don’t assume you won’t qualify. Take advantage of your lender’s knowledge and resources.
Refinancing
One of the reasons people don’t take advantage of this program is that they already own a home, and don’t realize it can be used to refinance.
Refinancing can offer the Veteran the opportunity to lower their current house payments or get cash out to pay off other debts and improve personal cash-flow or make improvements on the home.
Down Payment
Unlike a traditional conforming loan, a VA loan is in place to allow you to buy a home without a down payment. The only cash up front you’ll need are closing costs and pre-paid (property taxes and insurance).
Closing costs and pre-paid usually come to 3-5% of the total price of the home. VA does allow for the Seller to pay some, or all of these costs, up to 4% of the purchase price.
So in some cases, the whole transaction can be no or very low out of the pocket process. Confirm these numbers with your lender before adding it to your budgeting process.
Next Steps
You want to buy your dream home. What’s stopping you? If you’re a veteran or an active duty service member, it’s time to make that dream a reality.
Your next step should be to contact your lender at Strategic Mortgage and set things in motion. You’ll need to get a statement of what you qualify for before you start your home search. Once you’ve got this, you’re well on your way to making your big move.
