If you are a veteran that is self-employed, you may have slightly different rules you have to follow to get your VA loan. Don’t worry, they aren’t anything terrible. Lenders just need a different type of documentation to prove that you are financially secure. When you work for yourself, there isn’t a third party that can verify your income and/or employment. Because of that, VA lenders have to require a few different documents to determine your eligibility for the loan.
You Need Two Years of Self-Employment Income
Typically, you will need to prove your self-employment income for the last two years. This gives lenders ample opportunity to average your income over that time. This allows them to account for the peaks and valleys that your income likely goes through. This helps them qualify you for a loan amount that you can afford even during the ‘down times’ in your business.
A Decrease in Income Could be a Red Flag
As lenders look at your two years of tax returns, they will make sure your income stays steady or increases. If it decreases, they will closely evaluate how much it decreased and then ask for explanations from you.
There isn’t a certain threshold lenders follow regarding how much your income can decrease. They usually go on a case-by-case basis. If a lender sees that your income decreases habitually every year, they could end up declining your application. If, however, you have a one-time decrease that you can explain in writing and provide evidence that you overcame that issue, they may overlook it and approve your loan application.
Having a Business License is a Good Thing
If you run a business that you can get licensed, do it. This is more proof for the lender that you operate a ‘real’ business and are in it for the long haul. Lenders want to know that you run a full-time business that is out to make a profit rather than a side gig that you use for extra money.
You’ll Need a Year-to-Date Profit & Loss
Even though VA lenders will use your tax returns from the last two years to qualify you for the loan, they will also need a year-to-date profit & loss. This helps the lender see that you are on the same track this year as you were in past years according to your tax returns. They’ll use the P&L to see that your business is in good standing and has a good chance of being successful moving forward.
You Can be Self-Employed for Less Than 2 Years
Even though the VA requires 2 years of self-employment income to qualify for a VA loan, there is one exception. If you start a business within the same industry that you were in previously, you may get by with just one year of income from your self-employed company.
For example, if you worked for an accounting company for five years and then decided to start your own accounting firm, you may only need to wait one year. The five years you worked for someone else shows that you have the experience and knowledge to move forward and make your business successful.
The General Economy Will Play a Role in Your Approval
Lenders are required to look at the general outlook for the economy and businesses like yours in the economy when underwriting your loan. The main purpose is to make sure the business is likely to make enough income and succeed for the near future.
This also helps if you show a steady decline in income. Lenders can look at the economy and similar businesses to see if they are experiencing the same thing. The lender must then determine if this is a trend that will continue or if it is likely to turn itself around.
If your business is unique, meaning no other businesses like it are in existence, the lender must obtain a third party opinion regarding the viability of your business, its earnings, and ability to succeed.
If you are self-employed, have a good credit score, and a decent debt ratio, you have a good chance of VA loan approval. But, you may have to shop around with different lenders. Each lender has their own niche – some like self-employment income while others steer clear of them. Make sure you look for the best rates and terms to ensure that you get the best deal possible on your loan.