Self-employed veteran? How a VA lender reads it

This post covers the self-employment part of the VA rules: how long you need to have been in business, what documents the lender collects, and how the business feeds into residual income. It does not say whether a given file will be approved, and it is not tax or legal advice. Your lender may also have its own requirements on top of the VA rules, so ask early. For the general self-employed document list that applies across loan types, see how self-employed borrowers document income for a mortgage.

Where the rules come from

VA loan underwriting standards are set out in federal regulations, in title 38 of the Code of Federal Regulations, section 36.4340. One paragraph of that section deals with self-employment income, and another covers veterans who were recently discharged. Most of what follows comes from those two paragraphs. Source: 38 CFR 36.4340, Underwriting standards

The two-year starting point

The rule says that, generally, self-employment income counts as stable when you have been in business for at least two years. Our post on the two-year self-employment rule and its exceptions covers how conventional and FHA loans handle their own versions.

Under two years is not an automatic no. The VA wording says less than two years of self-employment income usually cannot be treated as stable unless you have previous related employment, extensive specialized training, or both. If you opened a plumbing business after years as a plumber for someone else, that earlier work is the kind of history the rule points to.

Under one year is harder. The rule says it will rarely be possible to show that income is stable when you have been self-employed less than a year, and that those cases need in-depth development. In plain terms, the lender will want a lot more explanation and paper before it can count that income, and it may not be able to.

Military duty can add weight in some files

The same section has a separate paragraph for recently discharged veterans who have little work history outside the military. It says the lender should consider the duties you performed in the service. When those duties are similar to, or directly related to, your current work, they can add weight to your present experience.

That paragraph is written about new jobs, not businesses, so do not read it as a promise. Still, if your business grew out of what you did in uniform, such as an electrician who served as one, write it down and give it to your lender. It is part of the story a lender needs when it looks at a short business history.

The documents the VA rule lists

The regulation lists what a lender must collect for every self-employed borrower:

• A profit and loss statement for the prior fiscal year, plus year to date since that year ended, or for whatever shorter period your records cover.
• A balance sheet based on your financial records.
• Signed individual federal tax returns with all schedules for the previous two years, or for a longer period if that is needed to show a good earnings record.
• If the business is a corporation or a partnership, its signed federal business tax returns with all schedules for the previous two years.
• If the business is a corporation or a partnership, a list of every stockholder or partner showing the interest each one holds.

The statements have to be detailed enough for an underwriter to make a decision. If they are not, the rule allows the lender to require an independent audit by a Certified Public Accountant, on you, the business, or both. Some files may also call for a written credit report on the business as well as on you. Our post on when a lender asks for a year-to-date P&L explains that statement in more detail.

Will the business keep going?

The part of the rule written for recently discharged and newly retired veterans states the core question for a self-employed borrower directly: are there reasonable prospects that the business will succeed and produce the income needed? If the lender cannot reach a favorable answer, that income is not used in the loan analysis.

The rule also gives a way to handle a business that is hard to judge. When the business is an unusual type and its future is hard to predict, the lender may ask you, or another qualified person with recognized expertise, to explain what the business does and why. If you run something a typical underwriter has not seen before, a short plain description of how it earns money saves time.

How the business shows up in residual income

VA loans use residual income, the money left over each month after housing costs and other monthly obligations, to judge whether a household can cover living expenses. The rule says every member of the household counts toward that test, even a spouse who is not on the loan.

For a self-employed borrower, the income that goes into that math is the business income the lender accepts as stable. The rule notes that depreciation claimed on a self-employed return may be added back as income, and it tells lenders to account for federal income tax and Social Security when they figure what is left. Ask your lender how it is handling those deductions in your file. For more on the test itself, see our post on VA residual income checks before you make an offer.

A checklist before you apply

• Two years of signed personal federal returns with every schedule attached.
• Two years of signed business returns with schedules, if your business is a corporation or a partnership.
• A profit and loss statement and a balance sheet covering last fiscal year and this year to date.
• A list of owners and their shares, if you have partners or stockholders.
• If you have been in business under two years, a short history of your related past work or training, including any related military duties.
• A plain description of what your business does, if it is not a common type.
• Your Certificate of Eligibility, or a plan to get it. Our post on VA COE timing before you start house hunting covers that step.

Questions to ask a lender

• I have been self-employed for less than two years. What past work or training would you need to see?
• Will you need my business returns, or only my personal returns?
• Do you have requirements for self-employed VA borrowers beyond the VA rules?
• How are you treating depreciation and self-employment tax when you figure my residual income?

FAQ

Can I get a VA loan if I am self-employed?

Yes, self-employment income can be used for a VA loan. The lender has to find that the income is stable and likely to continue, and it collects the documents listed above to make that call.

Do I need two full years in business?

Generally yes, but not always. The rule allows less than two years when you have previous related employment or extensive specialized training. Under one year is rarely enough on its own.

Does my military experience count toward my business history?

It can help. The VA rule tells lenders to consider military duties that are similar or directly related to a recently discharged veteran's current work. How much weight it gets depends on the file, so bring it up with your lender.

One thing to do

Disclaimer: Jeff Shin, Mortgage Loan Originator, NMLS #1041652. Chicago. Equal Housing Lender. Not a commitment to lend.

Sources: 38 CFR 36.4340, Underwriting standards, processing procedures, lender responsibility, and lender certification (paragraphs on self-employment, recently discharged veterans, rental income, and residual income), via eCFR.