Revenue isn't qualifying income
A business can deposit $2 million a year and still produce very little mortgage qualifying income after expenses, taxes, ownership percentages and business obligations are considered.
The lender is trying to answer a narrower question: how much income is available to you personally, is it stable, and is it reasonably expected to continue?
That is why self employed jumbo underwriting should begin with tax returns and financial statements, not a stated annual income number.
Tax returns tell several stories at once
Personal and business returns can show taxable income, depreciation, amortization, interest expense, business use of home, one time gains or losses, shareholder distributions, guaranteed payments and retained earnings.
Some items may be added back under a program's rules because they're non cash expenses. Others can't.
A large deduction doesn't automatically become usable income just because it reduced taxes.
K1 income can be especially misunderstood
A K1 may report income allocated to you, but that doesn't always mean the cash was distributed.
Fannie Mae's self employment guidance specifically notes that partnership or S corporation income reported on the personal return may not represent income actually distributed to you. The lender may need to analyze whether the business has adequate liquidity and whether you have access to the income.
Jumbo investors may apply different documentation standards, but the underlying issue is the same.
Declining income is a red flag
A borrower who earned $400,000 two years ago and $250,000 last year shouldn't assume the lender will average the two years and use $325,000.
Declining income can require a more conservative calculation or additional explanation. Year to date results may be used to determine whether the decline has continued.
Strong current deposits don't necessarily erase a negative historical trend.
The business balance sheet matters when business assets are used
Many business owners plan to use company cash for the down payment or reserves.
That can create two underwriting questions:
- Is the borrower legally permitted to access the funds?
- Will removing the funds hurt the business that generates the qualifying income?
The second question is easy to overlook. You shouldn't drain working capital to create a stronger personal bank statement if doing so weakens the income source supporting the loan.
Debt paid by the business needs documentation
A personal credit report may show an auto loan or other debt that the business has actually been paying.
Some mortgage programs permit exclusion of certain business paid obligations if the required history and documentation are met. The exact rule is investor specific.
Don't assume the debt disappears just because the business wrote the checks. Document it properly.
Example: high cash flow, lower qualifying income
Assume a business owner says the company generated $600,000 of cash flow last year. The tax returns show $280,000 of income attributable to you after permissible adjustments. The current year is tracking at $250,000.
A lender may qualify you closer to the lower supported level rather than the $600,000 headline number.
If the proposed jumbo housing payment requires $400,000 of annual qualifying income, the file has an income problem even though the business itself appears successful.
Pre underwrite the business before making a strong offer
For a complex jumbo borrower, collect the likely documents before contract:
- two years of personal returns,
- business returns where applicable,
- K 1s,
- year to date profit and loss statement,
- balance sheet when required,
- business ownership documentation,
- current personal and business asset statements,
- and a schedule of business debts.
Then have the lender calculate income before relying on the preapproval amount.
Alternative documentation should be treated as a different product
If tax returns don't support the desired loan, the answer isn't to manipulate the tax return calculation.
A bank statement, asset depletion or other non QM program may be available depending on the borrower and property. Those products use a different underwriting framework and can have different rates, fees, leverage and reserve requirements.
You should compare the alternative program honestly against a full documentation jumbo loan.
Tax planning and mortgage planning can conflict
Aggressive legitimate tax deductions may reduce taxable income and therefore reduce mortgage qualifying income.
Business owners planning a major purchase should discuss timing with their CPA and mortgage professional before filing, while respecting tax law and accurate reporting. The goal isn't to change truthful tax reporting. It is to understand the mortgage consequence before the return is final.
Bottom line
Self employed jumbo approval is an income analysis project.
The strongest files identify qualifying income, business liquidity and post closing reserves before a purchase contract is signed. That is far more reliable than starting with business revenue and hoping underwriting reaches the same conclusion.
Common questions
Can I get a jumbo loan with one year of self employment?
Some programs allow it if you worked in the same field before going out on your own. Most want two years of tax returns.
Do jumbo lenders add back depreciation?
Most do. Depreciation and some other non cash expenses can usually be added back, much like conventional underwriting.
Is there a bank statement jumbo loan?
Yes. Non QM lenders offer bank statement loans well above the conforming limit, usually with a higher rate and a larger down payment.