Qualifying for a jumbo loan while being self-employed isn’t much different than getting any other type of mortgage. In fact, the majority of buyers that utilize jumbo financing today are self-employed. Jumbo loans are loan amounts above the 2021 conforming limit of $647,200 (except a few high-cost locations) and do have some extra qualification guidelines compared to other loan types. Let’s take a look at some of the basic jumbo guidelines and how they apply to self-employed buyers.
A buyer who is considered self-employed obtains income from a business and not a standard employer. For those who do work for an employer, jumbo lenders ask for the most recent paycheck stubs, W2 forms and a completed verification of employment form or “VOE” Many of these borrowers get paid regularly, such as the 1st and 15th of each month yet the self-employed buyers pay works differently. Instead, the self-employed borrower gets paid when the services or products they provide are paid for by their clients. A self-employed borrower can get income from various sources.
Jumbo mortgage guidelines for the self-employed provide third-party documentation to the lender that shows consistent income that is likely to continue well into the future. This is done primarily by providing the two most recent tax returns. The net income reported on these two returns is averaged over the two year period and should be consistent from one year to the next.
For example, a self-employed borrower shows $210,000 in income for one year and $230,000 the next. The lender then adds those together to get $440,000 and then divides by 24 (months) to arrive at qualifying income. In this example, the income used is $18,333 per month.
It should also be noted here that mortgage companies today will also contact the IRS directly for copies of those very same transcripts and compared with the ones provided by the borrower. In addition, the IRS must confirm the transcripts have been received and accepted by the IRS.
It’s not uncommon for a borrower to file their tax returns while at the same time applying for a mortgage. Because jumbo lending guidelines require the two most recent returns, it’s possible the most recent may have been filed but not yet accepted by the IRS. In this instance, the borrowers may have to wait for the loan application to proceed until the IRS issues the acceptance designation.
Business owners will also need to provide a year to date profit and loss (P&L) statement in addition to their most recent bank statements. Sometimes lenders can ask for up to 12 months of statements in order to not necessarily verify sufficient cash to close but to verify consistent income from month-to-month. If the qualifying income is $18,333 per month the lender will then look for an average monthly amount of at least that.
Jumbo lenders do have some flexibility and if there doesn’t necessarily have to be exactly that amount each month but have demonstrated the funds deposited are consistent as well as making the determination the income will continue well into the future.
Additional Jumbo Guidelines:
Other mortgage guidelines apply such as qualifying credit scores, typically a 680 credit score for those buyers with 10 or 20 percent down payment. Higher 720+ credit scores will be needed from buyers financing 95%.
In addition, acceptable debt ratios and sufficient funds to close on the transaction. Funds to close include cash necessary for a down payment and closing costs as well as cash reserves needed after the loan has closed and funded. These requirements apply to both purchase and refinance transactions. Buyers can learn more about the Jumbo program down payment requirements on the Jumbo Purchase Page.
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