When you're buying a home or attempting to refinance, there are specific steps to getting approved with your mortgage Lender.
Applying for a loan (oftentimes done online) will provide them with the details about your annual income, your savings, and your debts... as well as employment history. Once submitted, your application is given to an employee called an "underwriter". That underwriter will review the information, make requests for clarifications, as needed, and request any additional documentation to support the information you've provided. For example, if your bank accounts show a large deposit made within the last 60 days, your underwriter may ask for supporting documents to prove the deposit's source. It is their job to make sure your loan meets the minimum standards set forth by the lender. This process of review is called "underwriting".
After underwriting is complete, the loan can be issued a "Clear-to-Close", which means that your application, indeed, meets all of the Lender's requirements. You'll close on your home shortly thereafter.
This underwriting process varies from applicant to applicant, loan to loan. The documentation required by an underwriter is different for every borrower. For those that are self-employed borrowers, documentation requirements can seem a bit over the top. In addition to the standard requests for bank statements and credit reports, self-employed borrowers are required to show income tax returns and additional documentation showing the strength of their businesses and earnings.
With a sigh of relief, self-employed borrowers have caught a break. Lenders have recently reduced the amount of paperwork many self-employed borrowers are required to supply for review. And, for some with "second jobs", the paperwork requirement is now waived altogether.
For self-employed borrowers, new mortgage guidelines state that the borrower must only have access to the business income... and, that the business shows adequate liquidity to support income withdrawals. This might look like a letter of incorporation or K-1 filing, which states your ownership percentage.
For self-employed borrowers without two years of federal tax returns, guidelines have been loosened to allow one year of returns, provided that those returns show 12 months of self-employment income and that a cash flow analysis of the business appears sound.
This is great news to young entrepreneurs that would have faced a stonewall of regulation when applying for a home loan. With rates still hovering under 4%, it is an ideal time to consider applying for a loan for the home of your dreams.