Self Employment and Required Documents

There are different types of self employment and different documents that are often required by lenders, for example:

Sole Proprietor - Schedule C Personal Tax Return

Partnership - Federal 1065 Partnership return. Personal income on K-1 and Schdeule E of 1040 forms.

"C" Corporation - Form 1120 Corporation tax return. Personal income w-2s.

"S" Corporation - Federal Tax return 1120S, K-1 from 1040s.

LLC and LLP - 1120S or 1065

Trader - Schdeule D 1040

Investor - Schedule E 1040

For self-employed or commissioned individuals who fall into one of the above categories, the most common documents you want to have available are:

Copies of your Federal income tax returns for the past two years, including all schedules and K-1's.

Most recent Year-To-Date Profit and Loss Statement signed and dated.

If you own 25% or more of a corporation, include copies of the Corporation tax returns for the past two years.

If you are in a partnership, provide partnership tax returns including all schedules for the past two years.

Because of the complicated documentation required for proof of income with self employed people, most elect a mortgage loan program where they are allowd to "state" their income. It is important to remember that these stated income programs do not exist so that the borrower can state any income that they desire. They exist so that the borrower does not have to be burdened with the heavy load of paperwork and documentation that would be needed in order to adequately prove the income.

3, 6 or 12 months of bank statements may also suffice for proof of income...

Many self-employed borrowers opt to utilize home mortgage programs that will allow them to use their bank statements for income documentation to qualify for a mortgage loan. Usually the total deposits of these bank statements will be added up each month and then divided by the required total number of months being used. Then the monthly average will be used as the monthly income for qualifying for the loan. Some lenders require 6 months statements for certain programs, others 12 months, and yet some others will require 24 months of statements. Consult your mortgage professional to see if this may be the right choice for you.

In some situations where the self employed borrower has used deductions to expense a majority (or all) of their income, they would be a good candidate for a stated income loan. When you go with a stated income loan for a self employed borrower, the income is stated for what is typical for their line of work which sometimes makes it easier to qualify for a loan.