Published on March 30, 2017
What You Need to Know About Applying for a Mortgage When You Are Self-Employed
For anyone that works for an employer, proving income when qualifying for a loan can be relatively simple. All you need to do is supply your recent pay stubs. But, for anyone that is self-employed, it is not quite so easy. If you are self-employed, do not panic, you just need to prepare ahead of time before qualifying for a mortgage loan. As soon as you decide you plan to purchase a home, speak to a mortgage lender about what information they would require for proof of income. The sooner you begin compiling the information, the better, since it can take some time to gather everything you need. Make no mistake, the process of qualifying for a loan remains the same, regardless of your employment. But, it is harder to show consistent, steady income which may make you a less desirable loan candidate to a lender.
There are many tax advantages to being self-employed. Self-employed individuals can write off business expenses but this, as NerdWallet points out, may actually impact your ability to qualify for a loan, “’That’s where it gets tricky,’ van den Brand says. Typically, self-employed tax filers write off a bunch of expenses that W-2 employees can’t. ‘And so their actual net income after all the write-offs actually is a lot lower than it would be otherwise.’ That makes it harder to qualify for a mortgage, because it hurts your debt-to-income ratio. The key is to show a net income, after write-offs, that meets the debt-to-income ratio that lenders prefer, usually ranging from 36% to 43%.” All that to say, it is far from impossible to get a mortgage loan if you are self-employed but you may pay a price.
Many self-employed borrowers ultimately pay a higher interest rate to secure their loan because they are seen as a “riskier” borrower. To qualify for your loan, you will likely be required to bring both personal and business tax returns from the previous two years. Additionally, your lender may require your business’ quarterly profit and loss statements from the previous two years. If you know you will be applying for a loan in the next two years, it may be beneficial to reduce the number of deductions you take in order to maximize your income. If you already own a home and have equity in the home, or if you have a solid down payment, that will also dramatically improve your ability to qualify for a mortgage and for the amount that you want. You are not the first self-employed borrower and you are certainly not the last. Lenders are familiar with self-employed borrowers and will often work with you to make the loan process as easy as possible. By getting all of your ducks in a row, keeping good records, and supplying all necessary information, you will increase your likelihood of acquiring the mortgage you want.