How to Qualify for Self Employed Mortgage Loans
Buying a house is hard enough as it is. Being self employed doesn’t make it impossible, but it certainly adds obstacles to buying a house. The process is easier when you work a typical 9-5 job, but for the self employed, all is not lost. Follow these simple tips and easily qualify for self employed mortgage loans.
Have your tax returns ready
For most people with employers that aren’t themselves, they need to simply provide their lender with W-2 forms. Self employed people however, don’t have w-2s and need to provide two years worth of tax returns (1040s) in order to prove they have a sufficient income level. Lenders want to see at least 2 years of steady income, and if you employ yourself, tax returns are the only way to do that.
If you own your own business, some lenders may also ask to see profit and loss statements and other statements from various business accounts. It’s good to work closely with an accountant to carefully prepare any and all paperwork need to present to lenders.
Keep your accounts separate
It’s rarely a good idea to mix business and pleasure. When you’re self employed, mortgage loans are going to require a very clear picture of your financial situation. Make sure when you’re doing your accounting to keep you personal and business accounts separate. For tax purposes this will make your life much easier. Open up a separate account to charge all your business related expenses.
Make sure all other factors are in good shape
Tax returns will be crucial for lenders reviewing your loan application, but it’s not the only thing to worry about. Just like any other person applying for a mortgage loan, you’ll want to have a good credit score and a sufficient income-to-debt-ratio. You’ll also want to have cost of living funds on hand.
Especially when you’re self employed, your income may vary from month to month. People who own their own business frequently have sporadic monthly incomes. Sometimes that may pose a problem, but can be easily overcome provided that all other factors are rock solid. The one most in your control in that case is your credit score.
If you are trying to buy a home while self employed take time to build up your credit score and pay down all your debts. Everyone should do that anyway, but especially self employeds looking to buy homes.
Don’t go overboard with deductions
Typically it’s good for people to take advantage of various tax deductions. However, for self employed people applying for mortgage loans, it can actually hurt your application. When reviewing self employed applicants, lenders look at post-deduction income, meaning your total net income. The tax returns for the years you provide should be as high-net as possible with as few deductions as possible. It’s a bit of a balancing act as taking fewer deductions means your net income may be smaller since you’re paying more in taxes, but the right balance can get your loan approved faster.
Ultimately you’re going to want to take extra time when shopping around for lenders. Since your application will be more unconventional than most people’s, it’s important to find the right lender. During the interview process, inquire about past experience working with self employed applicants. Self employed mortgage loans are trickier to qualify for, but it’s not impossible. As long as you take extra precaution and pay extra attention to your accounting, you’ll be fine.