Self-Employed Can't Get a Mortgage? What USDA Attachment 4-C Actually Says
Everyone says self-employed people can't get a mortgage. The USDA guideline doesn't say that. It spells out exactly when business income counts as stable and exactly how it gets measured. To walk through it, I'll use Alison, a fictional, illustrative business owner near Hollywood, SC.
Alison's situation
Alison owns her business. The business is real, she works hard at it, and she is unsure how a lender will read her income. She has heard that write-offs on a tax return can make a business owner look weak on paper. She has also heard that lenders just say no to people who work for themselves.
Alison is not a real client. She is an illustration of a situation that comes up often for self-employed people considering a USDA loan in South Carolina. The rumor mill is loud. The guideline is quiet and specific, and that is the part worth reading.
Step one: are you considered self-employed?
The USDA guideline answers this in its first sentence: "An applicant who has a 25% or greater ownership interest in a business is considered self-employed and a cash flow analysis of the applicant's Federal Income Tax Returns is required."
So if Alison owns a quarter or more of her business, she is treated as self-employed, and the lender must do a cash flow analysis of her Federal Income Tax Returns. That is not a penalty. That is the measuring method. Her income gets read through her returns, in a defined way.
Step two: when is the income stable?
Next comes the rule most business owners want to hear: "Income from self-employment is considered stable if the applicant has been self-employed for two or more years."
Two or more years is the line. The guideline also says: "The income for an applicant self-employed for less than one year is not to be considered stable for repayment purposes." The passage I'm quoting does not spell out what happens in the stretch between one and two years, so that is a good thing to ask your loan officer directly instead of guessing.
Step three: what happens to depreciation and losses?
This is where many business owners get surprised, in a good way. The guideline says: "Depreciation and depletion may be added back into repayment income but not annual income." It then adds: "Business losses are considered zero for annual income."
There are two measures of income at work here, repayment income and annual income. Depreciation can be added back for the first, not the second. That distinction matters, and it is easy to miss if nobody tells you it exists.
This is general information, not tax advice. Talk to a CPA or tax professional about your own returns and your own situation.
What Alison does with this
Alison does not hide her tax returns, because the guideline measures her business through them. Instead she asks one precise question of the loan officer:
"Under USDA Attachment 4-C, how many years of self-employment are you counting for me, and are you adding back depreciation for repayment income only?"
Then she requests the cash flow analysis of her Federal Income Tax Returns. Now she can see how her income is being read, line by line, instead of wondering.
Knowing the rule turns a worry into a question. And a question can be answered.
A note on the rest of the loan
Income is one piece. USDA loans have other requirements, and every file is different. This article explains how the guideline treats self-employment income, not whether any particular person will qualify.
Talk it through with me
If you own a business and want to understand where you stand, call me at 843-LOW-RATE. I'm Jason Sharon, and I find the path.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
Learn more about this loan program: Self-Employed Can't Get a Mortgage? What USDA Attachment 4-C Actually Says
