VA Loans and the Self Employed Borrower
A critical component of the VA home loan approval process involves comparing current income with anticipated monthly obligations. VA lenders validate an applicant’s income then consider the future mortgage payment, credit card payments, automobile loans and the like to arrive at a debt-to-income ratio that VA loans require. With employed borrowers, those that receive a W2 each year from the employer, it is relatively easy to determine monthly income because it’s typically listed on a paycheck stub. But for the self-employed borrower, the VA lender must go through a few more steps to arrive at the official income to be used for qualification.
The first requirement is that the veteran must be self-employed for at least two years, evidenced by signed and filed federal income tax returns. Anyone self-employed for less than two years must wait for this milestone to pass.
Once the two year history is established, the VA lender takes a look at the tax returns. For sole proprietors where the income is calculated on Schedule C, it’s the income amount after all deductions for expenses are subtracted and before federal, state and other withholdings are taken out.
For example, if you own a dog grooming business and you took in $50,000 last year and spent $20,000 on dog shampoo, your income for qualification purposes is $50,000 – $20,000 = $30,000 per year, or $2,500 per month. If the business is another type of business entity, the income used is taken from the corporate or partnership returns.
The lender will then take the two years of income and divide that number by 24 (months) to get an average. Finally, the lender makes sure the income isn’t deciding from year to year and if it is, the lender might turn down the application.
