What Are Self-employed Document Prep for Mortgage Applications?
Owning a home is a dream that many people have. Fortunately, you have the option of applying for a mortgage to finance your dream home. Some of the things that the lenders will require from you are a good credit and proof of an income. Unfortunately, those who are self-employed may find it hard to prove the latter, even in the case that they make more money than those who are on a salary. Without the ability to show the lender that you can consistently keep up with the mortgage repayment, it can be challenging to get loan approval.
Mortgage Financing For the Self Employed; Main Challenges
The major challenge the self-employed have when approaching lenders is to show that they have a consistent income. The lender will want to know how stable the business is. They will also look at the demand for what you offer, your financial strength, and the location of your business. You will, therefore, need to have proper documentation, unlike an employee who has the W-2 tax form.
Minimizing your income by writing off a significant portion of it as business expenses will also impact how much you can receive as mortgage. A lender will look at your debt to income ratio in determining your ability to service a mortgage. You will be safe if the ratio is lower than 43%.
Mortgage Application Documents for the Self-Employed
When you are self-employed and applying for a mortgage, you will need to convince the lender that you can make the repayments. They will, therefore, focus on your collateral, capacity to repay, and credit reputation. You must have the following documents when making a mortgage application:
- Business and personal tax returns for the past two years
- IRS form 4506-T, which allows the lender to request your tax return transcripts
- Profit and loss statement
- Bank statements for your business
- Verification documentation for your business
- Business license
- A breakdown of all your debts and monthly payments
- Any canceled checks for mortgage or rent
- Proof of additional income or payments, for instance, disability or social security
- Statement from clients or accountants (only applies to some lenders)
You must keep up with your tax returns even when you are self-employed. The lender will look at your tax return documents as proof that you have an income. They will not penalize you for the expected fluctuations that may occur due to the nature of running a business. They will, however, want to know that you have an income that can go into mortgage repayment. They will look at factors such as gross revenue, taxable income, expenses, and the annual trends, which they will use to forecast your business potential.
If you are new in self-employment, say one year, you can use your W-2 tax returns from your previous employer, together with your self-employment tax returns, to apply for a loan. You should note that some lenders may be unsure about your ability to maintain the mortgage repayments, if you have been in self-employment for a short time.
However, there have been some significant changes with regard to mortgage application for the self-employed. If your application qualifies for automated underwriting, you will only need one year of tax documentation to prove you have an income. Lenders are also embracing new calculation methods for those who have little or no income history.
Good Credit Reports
You must keep a close eye on your credit score by keeping up with the credit reports. You may be faithfully meeting your financial obligations, but there could be an error in your credit score report. It is essential that if you discover any mistake, you report it to the credit bureau immediately for correction.
The lender will also need proof that you are consistent with debt repayment. Any issues with delinquencies, bankruptcies, repossessions, foreclosures, or delinquencies will not work in your favor. They may also look at whether you have applied for credit in the past year by checking the status of your revolving credit account. They may also need to know the status of your business credit.
You can qualify for a mortgage, even with a poor credit score. Some lenders have a bad credit mortgage, but they are very expensive. They will charge a higher interest rate because they are not quite sure they will manage to recoup all their money.
Proof Of Emergency Funds
Having an emergency fund means that you plan your financing well, and can put aside something for a rainy day. A lender will require that you make your mortgage repayments faithfully every month. Due to the nature of the business, there are times when you will not earn as much money as you usually do. You will, however, still need to meet your financial obligations, and that is why you need the emergency fund.
The lender may ask you questions with regards to your bank account. They may, for example, want to know how much you have in your savings or checking account, and if you have balances in retirement accounts. They may also want to see whether you have other investments in areas such as bonds, stocks, or securities. They may as well look at whether or not you have made any large deposits within the last 60 days. All this is in an effort to know that you can make a down payment on your mortgage.
You must separate your personal from business funds. Keep an account of all invoices and expenses, and update your profit and loss statements quarterly.
Licenses are proof that you are operating legally, and are serious about self-employment.
While many people think that getting mortgage facilities for the self-employed is impossible, this could not be further from the truth. You may have to go through a few more hurdles than someone in employment will have to go through. However, with the right documentation and proof of income, you can easily qualify. We have highlighted some of the documents you must have if you hope to qualify for a mortgage. Make sure you work with a financial advisor to walk you through the process. The right mortgage broker will also advise you on the best way to proceed, to ensure that you increase your chances of qualifying for financing.