USDA Loans and the Self Employed Borrower

USDA Loans for Self Employed Borrowers

USDA lenders pay close attention to income. Other types of loans certainly make income an important qualifying issue but with USDA loans it pertains not only to affordability but to make sure the borrowers don’t make too much money. How much? No more than 115% of the median income for the area where the property is located. That’s easy to figure if someone gets a regular paycheck on the 1st and 15th but what about the entrepreneurs out there that run their own business? They may in fact pay themselves on a particular date but most small businesses get paid when a product or service is sold and a specific transaction date can’t be predicted.

For the self-employed, there may or may not be pay stubs distributed but they do have monthly income. To calculate qualifying income for a USDA loan, USDA guidelines require the individual be self-employed for at least two years. This is validated with two consecutive years of filed, signed federal income tax returns. For those relatively new to self-employment and perhaps only have 18 or 19 months flying solo, they’ll have to wait until federal income tax returns are filed for the second year. In fact, not only filed, but verification the IRS has accepted the newly filed return.

Lenders look for consistency. USDA loans want not only a two year history but a demonstration the income is not only regular but has a likelihood of continuance. Say that year 1 net profits are $50,000 and the next year $60,000. That’s something USDA lenders like to see. If there’s a falloff to something like $40,000, the lender will question the integrity of the business and the drop in income explained.

Once there are two years of consistent income verified, the lender adds the two years together then divides by 24 (months) to arrive at the qualifying amount. Lenders will also review recent bank statements to verify a similar amount is regularly deposited in the business bank accounts. And finally, be prepared to provide a year-to-date profit and loss statement. If you can meet these simple guidelines, a USDA loan just might be in your future.

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