Training Day 9: Building Self-Employed Loans
Introduction
Welcome to Training Day 9 of the Boots 2 Loans program. Today, we will focus on building loans for self-employed borrowers. We will discuss the unique challenges faced by self-employed borrowers, different business structures, how to analyze tax returns, and the process of creating tailored loans for this specific borrower group.
Understanding Self-Employed Borrowers
Self-employed borrowers are individuals who earn their income through their own business or as independent contractors. They typically report their income on tax forms such as Schedule C or Schedule K-1, and their income can be more variable and harder to document than W-2 borrowers.
Different Business Structures
Self-employed borrowers can have various business structures, including:
- Sole proprietorships: A single individual operates the business and reports income on Schedule C of their personal tax return.
- Partnerships: Two or more individuals operate the business, and each partner reports their share of income on Schedule K-1 of their personal tax return.
- Corporations: A separate legal entity with shareholders who report income on their personal tax returns based on dividends received.
- Limited Liability Companies (LLCs): A hybrid business structure that combines the features of a corporation and a partnership, with income reported on Schedule K-1 of the owners’ personal tax returns.
Analyzing Tax Returns
When building loans for self-employed borrowers, it is crucial to analyze their tax returns to verify their income accurately. Consider the following:
- Analyze the borrower’s last two years of tax returns to assess the stability and consistency of their income.
- Review Schedule C or Schedule K-1 to determine the borrower’s net income after deductions and expenses.
- Calculate the borrower’s average monthly income based on their tax returns.
Building Loans for Self-Employed Borrowers
When building loans for self-employed borrowers, consider the following:
- Verify the borrower’s business structure and income using their tax returns and other supporting documents.
- Calculate the borrower’s debt-to-income (DTI) ratio based on their net income and ensure it meets the lender’s guidelines.
- Adjust underwriting requirements and loan terms to accommodate the unique circumstances of self-employed borrowers, such as variable income or nontraditional documentation.
Conclusion
Today’s training has provided an overview of building loans for self-employed borrowers. As a Mortgage Loan Originator, you will use this knowledge to help self-employed borrowers navigate the mortgage process and obtain the right loan for their financial situation. By understanding the unique challenges faced by self-employed borrowers, accurately analyzing their tax returns, and tailoring loans to suit their specific needs, you will be better equipped to serve this growing segment of the market and help them achieve their homeownership goals.
