Self-Employment Income

You’ve probably heard that you need to be self-employed for at least two years before you can use self-employment income to qualify for a home loan.  Did you know there is an exception to that rule?

We may consider a one-year history of self-employment income as long as tax returns reflect income similar to the borrower’s previous employment income and the borrower provides the same product or service as their previous wage-earning job.  Think a CPA who was previously an employee at their firm and became a partner a year ago.  He works for the same firm, has the same clients, and enjoys the same responsibilities.  He just went from being a wage earner to a self-employed partner.

I used this guideline recently for a psychotherapist.  She went to university and obtained a degree in psychology.  After school, she worked for a non-profit providing psychotherapy services to their clients.  A little more than a year ago, she left the non-profit to open her own private practice.  We were able to show that her current income is consistent with the income she earned at the non-profit.  And the clients she serves in her private practice are a similar demographic to those served by the non-profit.

I also used this guideline for a boat captain.  My customer worked for years as an employee captaining a private yacht.  He left the private yacht to captain a fishing tender, where he was technically self-employed.  He received a 1099 based on the number of fish caught.  I was able to show the underwriter that my borrower has had a captain’s license for 25 years, he was sometimes paid W2 wages and sometimes paid 1099 wages, but his job (and his income) was the same regardless.

To summarize:

• Borrower must show at least one year of self-employment income on the most recent tax return.
• Self-employment income should be similar to previous wages.
• Current product, services, customers, and/or responsibilities should be similar to previous wage-earning employment.