Small Business Income and VA Loans

Small businesses are the backbone of the American economy.

And studies and surveys have shown consistently that, when given a choice, a vast majority of consumers would rather patronize a veteran-owned business over a civilian-owned one.

There are more than 3 million veteran-owned small businesses nationwide. Despite the tough economy and credit crunch, veterans in communities across the country are starting new businesses every day.

It’s important for new and aspiring entrepreneurs to understand that self-employment income is a thorny issue for most mortgage lenders. In fact, unless you’ve been in business for more than two years, it’s going to be difficult — if not downright impossible — for you to secure a VA home loan.

Two Years or Bust

That’s a tough pill to swallow for many new business owners. And it isn’t easy to tell service members that they’re probably going to have to wait. But lenders will want to see at least two years of tax returns in order to assess your income and your likely ability to handle a mortgage payment.

Anything less than that two-year period typically fails to meet the VA’s requirement that income be stable, reliable and likely to continue.

Self-employed veterans generally have to supply:

• Individual tax returns for previous two years
• Business tax returns for previous two years
• Financial statements like balance sheets and profit-and-loss statements

Checking Credit

Lenders may also choose to obtain a credit report on the business as well as on the applicant. There’s some estimated guesswork involved when reviewing the income potential of a self-employed veteran. Lenders will look at trends and at comparable businesses to try and determine whether the business owner is likely to make enough money to pay a mortgage in the coming years.

Similar to a veteran who has taken a pay cut with each successive job, self-employed veterans whose businesses are in decline will receive extra scrutiny. The last thing lenders want is to float a mortgage to an entrepreneur whose business is on the cusp of crumbling.

Bottom Line

Veterans who’ve recently started a business and have no other source of stable and reliable income will probably have to get past the two-year mark before they’re able to secure VA home financing.  You can go in-depth with a loan specialist regarding your specific situation at 855-524-7279.

Photo courtesy of dlofink