Under the New Lending landscape Self Employed or Commission borrowers have taken the brunt of the tighter mortgage rules. Ten years ago a self employed or commission borrower could sign a form declaring how much they made and as long as it made sense for their industry, the borrower had access to A lenders offering the lowest rates and terms just like a salary or hourly employee.
Today things are a lot different, however there are still plenty of options for self employed and commission earners.
A Lenders are lenders offering the best rates and terms with the lowest down payment of 5%. For Self Employed or Commission borrowers whose average two-year Net Income supports the mortgage amount needed to qualify you still get access to the best rates and terms through A lenders with as little as 5% down.
If your Net Income does not meet the income requirement for the mortgage but your Gross income does, then there is a still an option to qualify through an A lender. The key here would be the Gap between your Gross and Net income. For example if your Gross income before deductions is $100,000.00 and your Net is $20,000.00 and you need $90,000.00 to qualify for your mortgage then the chances are slim, If however your Gross is $100,000.00 and your Net is $65,000.00 and you need $90,000.00 to qualify for your mortgage it may be possible. It is case by case in these scenarios however if the lender accepts the income you qualify for the best rates and terms under the A lenders. Under this program though the minimum down payment is 10% for High Ratio Financing compared to 5% for regular income employees and for Conventional financing (you pay no insurance premium) is 35% compared to 20% for regular employees.
B Lenders are lenders who accept alternate documents to support the income. So, if an A lender is not possible the B lender is the best option. The increase in B lending over the past three years has been phenomenal as more and more self employed, and commission borrowers look to this area for their mortgage financing.
A B lender will look at your bank deposits to confirm your income rather then your tax returns. So, for example say you make $100,000.00 but only show $20,000.00 net income on your tax return but need $90,000.00 to qualify for the mortgage as along as your bank deposits add up to $90,000.00 then you are fine. The lender will need a minimum of six months bank deposits and do a twelve average. They may reduce some of the business income deposits based on expenses for your industry type.
Pros and cons of B lending.
Pros: 1. you can qualify based on bank deposit income, 2. Your rate is roughly only 1.00% higher then A lender (there is usually a 1% to 2 % fee), 3. Typically your term is just for one year so at renewal we have the option to try switch back to an A lender.
Cons: 1. You do need a minimum of 20% down. Your rate is higher but not by much and you pay a fee of 1% to 2%.
Conclusion. Everyone wants to fit into the A lending box for the best rates and terms however this is not always possible. I look a it this way. Right now a self employed or commission borrowers who show little net income on their tax returns have an option of increasing there Net Income to obtain A financing and pay more taxes OR they can go with a B lender and pay roughly 1% more in interest with a small fee. If you do the Math it is allot cheaper to pay an extra 1% in interest, then to declare more income and pay more taxes.