Each year roughly 14 million borrowers nation-wide are self employed. Most that are self employed have heard the “horror stories” of trying to obtain a mortgage loan. “With no income to show it’s a headache”, “It’s a lot more paperwork when owning a business”, some say, this may be true but it doesn’t have to be.
Some mortgage companies may struggle with self employed borrowers, but don’t let the “stories” frighten you, there are ways to easily obtain a mortgage while self-employed. Follow these steps to make the process easier on yourself!
It’s not as hard to be approved as you assume.
Yes mortgage lenders typically will review yourself, your business, and future outlook in depth. Lenders base your loan off of the ability to make the payment each month. This requires them to look in depth at your financial standing, business success and if it will be able to continue to flourish. There are a few things you can have in order before applying for a mortgage that lenders like to see and to make the process easier.
- Stable Income: Your income should over all trend upwards. Lenders know that as a self-employed individual your income will fluctuate and is acceptable. Lenders typically will require tax information to ensure a steady income flow has been established over the last 24 months in the business. Lenders determine year-to-year trends for gross revenue, expenses and taxable income for the business, this is used to project future business.
- Consistent Work: Lenders will typically ask for two years proof of income in the same industry. Some lenders may make exceptions for those who have only been self-employed for a short amount of time in the same field as your last employee position with proof of a W-2 or tax returns.
- Good Credit: Ideally as everything involving credit, lenders want to see if you can repay your debts in a timely manner. As known, Foreclosures, delinquencies, collections and bankruptcies will increase risk to them. Revolving credit accounts, personal and business will all be taken into consideration.
- Cash Reserves: Always having a decent cash reserve will up your chances. This shows lenders that in a down month of the business, you will still be able to make your payments.
- Single-Family Occupancy: Lenders are more likely to lend when the residence will serve as the primary home. This is a lower risk to lenders as it poses less risk.
Lower Risk By Planning Ahead.
Become a more attractive borrower by simply planning ahead. Have all documentation you would need as a self-employed applicant. The following should always be taken with you to apply for a home loan.
- Complete 2 year personal tax return
- Business tax returns of the past 2 years.
- IRS Form 4506-T, This gives permission to the lender to request tax transcripts if needed
- Profit and Loss statements
- Business Bank Statement
- A business license
- Monthly expenses and debts
- Copies of current rent or mortgage payment invoice.
- Any additional side income or payments. Other employment, Social Security, Military Reserve, etc.
Things I Can Do So I Can Buy In The Future
Improve Credit: Identify any problems or blemishes on your credit. Correct any errors before applying for a mortgage. Lenders could possibly deny or give you a higher interest rate depending on your credit score.
Pay Down Existing Debt: Improve your credit score by paying off existing debt. Get rid of store front credit cards and other unnecessary credit items. This will ultimately increase your DTI (debt to income ratio), and make it much easier to obtain a mortgage.
Save: Save money for two reasons; one, to have enough for a down-payment if needed, two, have the emergency fund that lenders like to see to ensure your payment can be made on a struggling month of the business.
Maintain A Clean Business: Make it a no-brainer on lenders to give you funds. Separate all your funds from the business from your personal accounts. Keep finances in order in the business and create an updated profit and loss statement each quarter.
It may seem like a daunting task but these ways will help make the process easier than you think. Don’t let your self-employment hold you back from what everyone deserves, the American dream of owning a home. Have questions or information? Click here.