For loan purposes, if you receive a W-2, you are an employee, unless you own more than 25% of the company that employs you. You are considered self-employed if your income is reported on a schedule C, if you own more than 25% of the company that employs you, or if your primary source of income is from a partnership, reported on Schedule E. If your partnership interest is greater than 25%, or in some cases even 10%, you may be asked to provide partnership tax returns; some borrowers, or their partners, are uncomfortable with that (confidentiality is one reason that many people choose a stated income loan, and avoid providing this information). If you are an investor with at least a three-year history of investment income—dividends, interest, and/or capital gains—or a two year history of receiving rental income, you are also considered self-employed.
Most problems with employment status usually concern self-employment. Most lenders want to see that you have been self-employed for at least two years, although there are some exceptions. A doctor who has gone from working in a hospital to opening a private practice, or a corporate IT manager who is now a computer networking consultant, are looked upon more favorably than a software engineer who has become a real estate agent, or a flight attendant who has become a landscaper.
Proof of self-employment is also critical. Most lenders will accept either:
If neither of those choices are an option some lenders will accept alternate documentation, for example letters from at least two clients who have worked with you for at least two years. Mortgage brokers know which lenders are more lenient. Being employed is not necessary to obtain a mortgage loan. Many lenders have ‘no doc’ programs that provide loans based only on your credit and the property. It is important that if you are not employed, have only a short time on the job, have a gap in employment, or are newly self-employed, your lender know early in the process.
