Applying for a Conventional Mortgage
To purchase or refinance, self-employed borrowers might have an issue qualifying. Lenders are required to document the borrower’s ability to repay through a formula called DTI ratio (debt-to-income). There are two forms of DTI: front-end and back-end. Front-end DTI equals PITI (principal, interest, taxes, and insurance) divided by gross monthly income. Back-end DTI equals PITI plus all expenses shown on credit report divided by gross monthly income. Lenders primarily evaluate the borrower’s back-end DTI. Conventional lenders typically go up to about 45-50% DTI, whereas hard money lender Marquee Funding Group can go up to about 60% DTI. For example, a DTI of 60% exists for a borrower with PITI of $5,000/month, other obligations of $1,000/month, and $10,000/month gross income.
Qualifying for a Conventional Loan
The only option for a self-employed borrower is to provide tax returns. However, self-employed borrowers tend to write off a lot of their income to reduce their tax obligations. To solve this common dilemma, Marquee can qualify self-employed borrowers using bank statements. The gross monthly income is calculated by averaging out the monthly deposits. This allows the borrower to maximize their disclosable income when applying.
When Borrower is an Entertainer or Athlete
Additionally, if a borrower is an entertainer or athlete, Marquee may determine the income based on future performance contracts. For example, a race car driver had a sponsorship paying $2 million later in the year. We could use that contract as income in qualifying for a loan. Another advantage of hard money loans for self-employed borrowers is that credit does not play a large factor, but more importantly is the amount of equity in the property. The ability to repay rule does not apply for business purpose loans. In addition to first mortgages for purchase or refinance, Marquee also offers second, third, or fourth mortgages in California and Colorado.