Not all people work a typical job. Not everyone works for an outside employer who cuts them a paycheck on a regular basis and provides them with a W2 at the end of the year for tax reporting purposes.
Some people chase the American dream by being self-employed. Whether they own a business in retail or other industries, or they’re taking advantage of the more abundant work-from-home-for-yourself opportunities that are available through freelance positions, a lot of people now earn their living on their own.
If you’ve decided to work for yourself, you may find it challenging to qualify for a mortgage. And while being self-employed can be a very stable, lucrative source of income, it does provide some challenges and extra hurdles when it comes to reporting this income as part of a mortgage approval process.
It’s very easy for an employee to show income history and stability with a regular salaried job that provides a W2. It may not be as easy, at least from a lender’s perspective, if you’re self-employed.
What Lenders Look for When You’re Self-Employed
Mortgage companies use specific guidelines when they lend money to a borrower. They want to ensure the borrower will be repaying their loan in a timely fashion according to the terms of the loan. As such, lenders look for stability in employment as one of the main factors when determining whether to approve someone for a mortgage.
A W2 employee can typically show more consistent wages from year to year, and more predictable wages in the future. If you’re self-employed, you may be generating enough income to afford the mortgage payments, but lenders will need to determine how viable they think that self-employment income will be in the future.
Along those lines, lenders will consider the demand for your business based on its location, its current financial strength, and whether your business is capable of continuing to provide you with enough income to afford your mortgage for the life of the loan.
In addition, you may see fluctuations in your income from year to year. And let’s not forget that since you’re self-employed, you probably write off a significant portion of your income as business expenses, which could limit how much of a mortgage you can qualify for, because mortgages are based off taxable income.
How Can You Get a Mortgage If You’re Self-Employed?
Getting a mortgage if you’re self employed isn’t as straightforward as if you’re a W2 employee, but it isn’t impossible either. You may need to take additional steps and ensure that your bookkeeping is precise and in order, but in no way should being an unconventional self-employed worker mean you can’t get a mortgage.
Lenders want to see stable or increasing income from your business. Lenders do realize that your income may fluctuate, but the less fluctuation you can show, especially frequent drops in income levels, the better off you’ll be. You’ll also benefit from consistent work. The longer your history of self-employment income that is stable, the better chances you have of getting approved for the mortgage you want.
Just like people who earn their living through a job that provides a W2, if you have good credit, cash reserves, and a significant down payment, this will go a long way in proving to a lender that you can afford the mortgage. All of these factors show the lender that there is a reduced risk in lending the money.
It’s very important, then, that you not only concentrate on providing a stable, growing income, but that you maintain solid credit and a good amount of cash in the bank in case your income drops. A high down payment will also help a lender see that you have the ability to pay, while also creating a cushion of equity in the home right from the start.
Here are a few tips to keep in mind if you’re self-employed and planning on applying for a mortgage in the upcoming months:
- Maintain a healthy credit report with a high score
- Carry as little debt as possible
- Save as much money as possible in case of a downward fluctuation in income
- Keep clean, detailed business records
Self-Employed Mortgage Documentation Needed
There are a few specific documents that a non-W2 worker will need when applying for a mortgage, which include:
- Complete personal tax returns for the last two years
- Business or self-employment tax returns for two years, if it’s separate from the personal tax return
- Profit and loss statements
- Bank statements for both business and personal accounts
- Business verification and a business license
- A list of debts with minimum monthly payments
- Any additional income or payments
It’s important that you keep all this documentation in order so it’s easily accessible to provide to the lender.
Unconventional Doesn’t Mean Unqualified
Just because you don’t have a conventional type of income doesn’t mean you’re unqualified to get a mortgage. Embrace Home Loans likes unconventional, and we offer a program called Beyond that caters to the self-employed. Beyond can be a game-changer if you own a business or are self-employed, report a low adjusted gross income on tax returns, and/or have a FICO score lower than 700.
These loans are approved for up to $2.5 million on a primary residence for qualified applicants, with no private mortgage insurance and higher loan-to-value loans. Beyond is designed for self-employed people who can show business cash flow on bank statements for qualifying income rather than what is traditionally reported on tax returns.
Contact us today to learn more.