This is a guest post by Joseph Kelly, mortgage expert and president of Arc Loan Mortgage Management.
An increasing number of people have side businesses, or “gigs,” that make up part of their financial picture, though few give much thought to the effect they will have when it comes to getting a mortgage, either to purchase or refinance a home. Sometimes having the extra income from a side job or business makes the deal work, but sadly sometimes it will kill it. Here are some of the aspects that mortgage lenders will look at so you have the chance to make adjustments, if necessary.
The majority of mortgages are called “traditional residential mortgages,” which include conventional, FHA, and VA mortgages underwritten to standard guidelines. That is the realm we’ll cover here. One may certainly also seek mortgages from private lenders, credit unions, and community banks, which might have other rules when it comes to considering the benefit or liability of a side business or job.
Let’s separate this topic into two categories of extra income. Note that for either category, you’ll usually need a two-year history showing that income in order for it to help you qualify for a mortgage. If your extra income is stable or rising, then you will be in good shape to use at least a two-year average of the income. However, if it is declining, then it will be unlikely you will be able to use it—though there are exceptions.
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Working for Someone Else (a Job Plus a Side Gig)
If you have a second job working for someone else, you are probably paid in one of these ways: W-2 salary, hourly, commission, bonuses, or some combination. If your extra income varies from year to year, lenders will first look to see that the income is not declining, then they will average it for the amount of extra income you may use for qualifying.
If you have unreimbursed work expenses reported on your taxes, the lender may deduct those amounts from your earnings. For example, you make an extra $1,000 a month driving for Uber, but you deduct $400 a month on your taxes for various expenses. Thus your “net income” is really $600 a month.
Working for Yourself (a Business)
Ah, the joys of owning a business! There are many possible rewards, but when it comes to applying for a mortgage, be prepared for added paperwork. As with the first category, lenders will be looking first for:
- Income history (at least two years reported on tax returns),
- Level or increasing net income (declining income year-to-year could negate any benefit, or even hurt you if you show losses), and
- Year-to-date information like a profit and loss statement (does not need to be audited) to support that your income is in line with previous years.
The most important advice if you have a side business reported on your taxes is this: If your net income is actually a loss due to write-offs, the side business will hurt you, not help you, when qualifying for a mortgage.
Keep that in mind as you plan. And be prepared to provide documentation of additional income, including trends from previous years.